Firm Size and Capital Structure

45 Pages Posted: 23 Mar 2005

See all articles by Alexander Kurshev

Alexander Kurshev

London Business School

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007


Firm size has been empirically found to be strongly positively related to capital structure. This paper investigates whether a dynamic capital structure model can explain the cross-sectional size-leverage relationship. The driving force that we consider is the presence of fixed costs of external financing that lead to infrequent restructuring and create a wedge between small and large firms. We find four firm-size effects on leverage. Small firms choose higher leverage at the moment of refinancing to compensate for less frequent rebalancings. Their longer waiting times between refinancings lead to lower levels of leverage at the end of restructuring periods. Within one refinancing cycle the intertemporal relationship between leverage and firm size is negative. Finally, there is a mass of firms opting for no leverage. The analysis of dynamic economy demonstrates that in cross-section the relationship between leverage and size is positive and thus fixed costs of financing contribute to the explanation of the stylized size-leverage relationship. However, the relationship changes sign when we control for the presence of unlevered firms.

Keywords: Capital structure, leverage, firm size, transaction costs, default, dynamic programming, dynamic economy, refinancing point

JEL Classification: G12, G32

Suggested Citation

Kurshev, Alexander and Strebulaev, Ilya A., Firm Size and Capital Structure (January 2007). AFA 2008 New Orleans Meetings Paper, Available at SSRN: or

Alexander Kurshev

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Ilya A. Strebulaev (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States


National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics