Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure

Abstract

We find that the majority of variation in leverage ratios is driven by an unobserved time-invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity. Copyright (c) 2008 The American Finance Association.

Leverage Risk. The Weight of Borrowed Capital Distinguishes the Solvency of Firms: An Empirical Analysis on a Sample of 4,500 Italian SMEs

“…In line with the results achieved by MacKay and Phillips (2005), Lemmon et al (2008) summarise the scholars' assumptions by stating that the changes in indebtedness levels are more usual in a firm with respect to changes in industry averages, and they are more regular in a delimited market compared to the changes in terms of typology of firm.…”

Capital Structure Adjustment in Brazilian Family Firms

“…In line with this target leverage argument, several studies suggest that capital structure is highly stable over time (e.g., Lemmon, Roberts, & Zender, 2008), even though DeAngelo and Roll (2015) show evidence that this stability holds only for a small fraction of firms. Contrary to the trade-off hypothesis, however, other important theories such as pecking order (Myers & Majluf, 1984), market timing (Baker & Wurgler, 2002), and managerial inertia (Welch, 2004) offer alternative motivations for financing decisions and disregard the existence of optimal target leverage.…”

Stability of CEE Banks in the Crisis Years. Capital Adequacy and Too-Big-to-Fail Parent Banks in CEE

“…Special taxes on banking turnover or asset values have impacts similar to crises or to tightening regulatory measures. The authors refer to Lemmon et al (2008), Flannery and Rangan (2006), Berger et al (2008), and to Gropp and Heider (2009), who examined the determinants of the optimum amount of bank capital and the speed of related capital adjustment. They emphasised that sometimes market implications overwrite or exceeds the regulation, and so the regulation will have no effect.…”