Understanding the Fundamental Persistence of Corporate Capital Structure

60 Pages Posted: 18 Mar 2010 Last revised: 5 Aug 2010

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK)

Date Written: August 4, 2010

Abstract

When predicting future leverage ratios, the explanatory power of initial residual leverage falls quickly over time, while initial standard leverage determinants retain much of their explanatory power. To make sense of this fundamental persistence, we show that growth-type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously span significantly dispersed and persistently different leverage ratios. Different growth-types suggest persistently distinct investment styles (of tangible investments versus R&D or intangible investments). This gives rise to specific market imperfections and hence induces different financing behaviors. Therefore, growth-type plays a stable role in anchoring long-run capital structure.

Keywords: Capital Structure, Persistence, Initial Determination, Fair Market Timing, Growth Type Compatibility

JEL Classification: G14, G32, G34

Suggested Citation

Wu, Xueping and Au Yeung, Chau Kin, Understanding the Fundamental Persistence of Corporate Capital Structure (August 4, 2010). Available at SSRN: https://ssrn.com/abstract=1573213 or http://dx.doi.org/10.2139/ssrn.1573213

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Chau Kin Au Yeung (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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