Capital Structure Instability

Abstract

This paper provides a compact summary of the evidence on capital structure instability and a case-based exploratory investigation of sources of such instability. Substantial instability in capital structure is the norm at publicly held nonfinancial firms. Firm-specific episodes of leverage stability do arise from time to time, but they are the exception, not the rule, and they are virtually always temporary. The leverage cross-section is far from stable over long horizons, with the ability of a firm’s current leverage to predict its future leverage evaporating as the time between cross-sections lengthens. Case analyses of 24 firms from the Dow Jones Industrial Average indicate that capital structure instability is often linked to funding of company expansion and also reflects payout-policy and financial-flexibility considerations.

Keywords: Capital Structure Stability, Leverage Target, Leverage Persistence

JEL Classification: G32, G31, G35, G33