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

Posted: 10 Jan 2012

See all articles by John R. Graham

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: December 2011

Abstract

This article 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 seven broad themes: (a) Important variables have been mismeasured in empirical tests, (b) the impact of leverage on nonfinancial stakeholders is important, (c) the supply side of capital affects corporate capital structure, (d) richer features of financial contracts have been underresearched, (e) value effects due to capital structure appear to be modest over wide ranges of leverage, (f) estimates of leverage adjustment speeds are biased, and (g) capital structure dynamics have not been adequately considered. Much progress has been made in 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.

Suggested Citation

Graham, John Robert and Leary, Mark T., A Review of Empirical Capital Structure Research and Directions for the Future (December 2011). Annual Review of Financial Economics, Vol. 3, pp. 309-345, 2011. Available at SSRN: https://ssrn.com/abstract=1981828 or http://dx.doi.org/10.1146/annurev-financial-102710-144821

John Robert Graham (Contact Author)

Duke University ( email )

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Mark T. Leary

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

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St. Louis, MO 63130-4899
United States

National Bureau of Economic Research (NBER) ( email )

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