Driving Forces of Corporate Capital Structure Variation Over Time

43 Pages Posted: 15 Mar 2011 Last revised: 20 Feb 2013

See all articles by Pedram Nezafat

Pedram Nezafat

University of Michigan at Ann Arbor - Finance

Date Written: February 15, 2013

Abstract

This paper develops a dynamic model of capital structure. It uses the model to determine whether shifts in the demand for capital or shifts in the supply of capital is the key driving force behind capital structure variation over time. Simulations of the model show that adjusting capital structure in response to variation in the supply of capital results in persistence of dividend and market leverage that is lower than the observed persistence in the data. When variation in the supply of capital is shut down, the persistence of dividend and market leverage of simulated firms is reasonably close to that in the data. The results suggest that shifts in the demand for capital are likely the key driving force behind capital structure variation over time.

Keywords: Corporate Capital Structure, Capital Market Driven Corporate Finance, Structural Models of Capital Structure

JEL Classification: G32

Suggested Citation

Nezafat, Pedram, Driving Forces of Corporate Capital Structure Variation Over Time (February 15, 2013). Available at SSRN: https://ssrn.com/abstract=1786874 or http://dx.doi.org/10.2139/ssrn.1786874

Pedram Nezafat (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

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