Capital Structure Instability

Forthcoming, Journal of Applied Corporate Finance

26 Pages Posted: 21 Feb 2017

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Richard Roll

California Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2016

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

Suggested Citation

DeAngelo, Harry and Roll, Richard W., Capital Structure Instability (December 1, 2016). Forthcoming, Journal of Applied Corporate Finance, Available at SSRN: https://ssrn.com/abstract=2919941

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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