On the Evolution of Corporate Capital Structures
38 Pages Posted: 14 Mar 2009 Last revised: 25 Feb 2015
Date Written: 2015
Most, if not all, published theoretical models of capital structure decisions assume that all firms follow the same capital structure decision process or strategy. We argue that such an assumption is inconsistent with extant evidence. Instead we argue that there is heterogeneity in the decision processes and strategies that managers follow, and that they make adaptive adjustments to their strategies that are conditioned on the choices of other firms as well as their prior choices. Using data on U.S. corporate capital structures between 1965 through 2003, we find evidence that is consistent with our proposed alternative. Our characterization of the evolution of corporate capital structures emphasizes the roles of a firm’s initial capital structure and its competitors’ capital structure strategies.
Keywords: firm dynamics, capital structure, fractional variables
JEL Classification: D20, G32
Suggested Citation: Suggested Citation