The Dynamics of Capital Structure: An Empirical Analysis of a Partially Observable System

Duke University, Fuqua School of Business Working Paper

53 Pages Posted: 18 Apr 2002

See all articles by Michael R. Roberts

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Date Written: January 14, 2002

Abstract

This paper examines the dynamic properties of capital structure in a state-space framework. A system of stochastic differential equations is used to specify the dynamics for a firm's debt-to-equity ratio and the determinants of capital structure. The framework addresses statistical issues such as measurement error, missing data and endogeneity. There are several important results. First, firms gradually adjust their capital structure to a firm-specific, time-varying target, as opposed to a fixed level or industry average. Second, the rate at which they revert back to the target depends on several factors: the current position of their leverage relative to the target, their industry, and their financial health. Finally, the statistical issues have a significant impact on the results and subsequent conclusions. The primary economic conclusion is that observed financing behavior may be driven by concerns over credit-worthiness and access to external funds.

Keywords: Capital Structure, Leverage, Dynamics, Kalman Filter

JEL Classification: G32, G33, C33

Suggested Citation

Roberts, Michael R., The Dynamics of Capital Structure: An Empirical Analysis of a Partially Observable System (January 14, 2002). Duke University, Fuqua School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=305885 or http://dx.doi.org/10.2139/ssrn.305885

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Register to save articles to
your library

Register

Paper statistics

Downloads
1,729
Abstract Views
6,127
rank
9,216
PlumX Metrics