An Empirical Target Zone Model of Dynamic Capital Structure

53 Pages Posted: 19 Mar 2011 Last revised: 19 Nov 2015

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: February 16, 2015

Abstract

We develop and estimate a general (S, s) model of capital structure to investigate the relation between target leverage, refinancing thresholds, and firm characteristics in a dynamic environment. We find that firms’ target leverage is pro-cyclical, consistent with dynamic capital structure models, but in contrast to traditional regression results. The target leverage zone, in which companies optimally allow leverage to float, widens during recessions. Most of the time series variation in capital structure policy variables is due to aggregate macroeconomic factors, rather than changes in firm-specific variables.

Keywords: Capital structure, refinancing, adjustment costs, structural models, dynamic models

Suggested Citation

Korteweg, Arthur G. and Strebulaev, Ilya A., An Empirical Target Zone Model of Dynamic Capital Structure (February 16, 2015). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1787001 or http://dx.doi.org/10.2139/ssrn.1787001

Arthur G. Korteweg (Contact Author)

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

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Cambridge, MA 02138
United States

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