Testing Dynamic Tradeoff Theory: Evidence from Rebalancing Points.

38 Pages Posted: 16 May 2011 Last revised: 20 Dec 2012

Andras Danis

Georgia Institute of Technology - Scheller College of Business

Daniel A. Rettl

Humboldt University of Berlin - School of Business and Economics

Date Written: July 15, 2011

Abstract

We develop a simple methodology to identify firms that are at or close to their optimal capital structure. Using this methodology we present cross-sectional and time series evidence in favor of dynamic tradeoff theory. In particular, at rebalancing points the relationship between profitability and leverage is positive, consistent with theoretical predictions. Also, the time series of market leverage, profitability, and equity payouts in the years prior to rebalancing events match the patterns obtained from simulated data. Our methodology is robust to recent critiques of empirical tests of dynamic tradeoff theory.

Keywords: empirical corporate finance, capital structure, dynamic tradeoff theory

JEL Classification: G30, G32

Suggested Citation

Danis, Andras and Rettl, Daniel A., Testing Dynamic Tradeoff Theory: Evidence from Rebalancing Points. (July 15, 2011). International Conference of the French Finance Association (AFFI), May 11-13, 2011. Available at SSRN: https://ssrn.com/abstract=1833425 or http://dx.doi.org/10.2139/ssrn.1833425

Andras Danis

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://scheller.gatech.edu/danis

Daniel A. Rettl (Contact Author)

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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