A Review of Empirical Capital Structure Research and Directions for the Future

59 Pages Posted: 22 Dec 2010 Last revised: 24 Oct 2011

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Mark T. Leary

Washington University in St. Louis - Olin Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 7, 2011

Abstract

This paper reviews empirical capital structure research, concentrating on papers published since 2005. We begin by documenting three dimensions of capital structure variation: cross-firm, cross-industry, and within-firm through time. We summarize how well the traditional trade-off and pecking order approaches explain these sources of variation and highlight their empirical shortcomings. We review recent research that attempts to address these shortcomings, much of which follows the following broad themes: i) Important variables have been mis-measured in empirical tests, ii) The impact of leverage on non-financial stakeholders is important, iii) The supply side of capital affects corporate capital structure, iv) Richer features of financial contracts have been under-researched, v) Value effects due to capital structure appear to be modest over wide ranges of leverage, vi) Estimates of leverage adjustment speeds are biased, vii) Capital structure dynamics have not been adequately considered. Much progress has been made addressing these issues, some of which has led to the study of an expanded range of capital structure topics, including debt maturity, loan and covenant characteristics, collateral effects, and alternative financing sources such as leasing and credit lines. We conclude by summarizing unanswered questions and areas for future research.

Keywords: capital structure, leverage, debt ratio, tradeoff theory, financial contracting, target leverage, speed of adjustment, partial adjustment model

JEL Classification: G32

Suggested Citation

Graham, John R. and Leary , Mark T., A Review of Empirical Capital Structure Research and Directions for the Future (April 7, 2011). Annual Review of Financial Economics, Vol. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1729388 or http://dx.doi.org/10.2139/ssrn.1729388

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark T. Leary (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
10,306
Rank
282
Abstract Views
49,301