How Stable are Corporate Capital Structures?
University of Southern California - Marshall School of Business - Finance and Business Economics Department
California Institute of Technology
Journal of Finance, Forthcoming
Leverage cross sections more than a few years apart differ markedly, with similarities evaporating as the time between cross sections lengthens. Many firms have high and low leverage at different times, but few keep debt-to-assets ratios consistently above 0.500. Capital-structure stability is the exception, not the rule, occurs primarily at low leverage, and is virtually always temporary, with many firms abandoning low leverage during the post-war boom. Industry-median leverage varies widely over time. Target-leverage models that place little or no weight on maintaining a particular leverage ratio do a good job replicating the substantial instability of the actual leverage cross-section.
Number of Pages in PDF File: 50
Keywords: capital structure stability, leverage target, leverage persistence
JEL Classification: G32, G31, G35, G33
Date posted: March 19, 2011 ; Last revised: August 22, 2013