Common Factors in Corporate Capital Structure

65 Pages Posted: 2 Jul 2013

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Tao Shen

Tsinghua University

Date Written: July 2, 2013


This paper reexamines the controversy over capital structure adjustment speed. We show that firms move leverage towards target much faster than generally understood. To do this we use reduced rank regressions to extract 4 common factors for corporate leverage using 146 variables, including value weighted aggregates of standard firm attributes, and macroeconomic variables. Firm specific factor loadings on all of these are estimated. The model provides estimates of time varying leverage targets. More than half of the leverage variation by the median firm is explained, and there is significant predictive ability for several years out-of-sample. Firms actively adjust both debt and equity to move leverage in the direction of the estimated targets. A straw man null hypothesis of purely random financing actions is easily rejected. Slow speeds of adjustment reported in previous studies may reflect the use of static leverage targets while firms actually care about time varying targets.

Keywords: capital structure, leverage target, reduced rank regression, partial adjustment

JEL Classification: C32, G30, G32

Suggested Citation

Frank, Murray Z. and Shen, Tao, Common Factors in Corporate Capital Structure (July 2, 2013). Available at SSRN: or

Murray Z. Frank (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Tao Shen

Tsinghua University ( email )

Department of Finance
School of Economics and Management

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