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A Review of Empirical Capital Structure Research and Directions for the Future

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  • John R. Graham

    ()
    (Fuqua School of Business, Duke University, Durham, North Carolina 27708
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Mark T. Leary

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

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    Abstract

    This article reviews empirical capital structure research, concentrating on papers published since 2005. We begin by documenting three dimensions of capital structure variation: cross firm, cross industry, and within firm through time. We summarize how well the traditional trade-off and pecking order approaches explain these sources of variation and highlight their empirical shortcomings. We review recent research that attempts to address these shortcomings, much of which follows seven broad themes: (a) Important variables have been mismeasured in empirical tests, (b) the impact of leverage on nonfinancial stakeholders is important, (c) the supply side of capital affects corporate capital structure, (d) richer features of financial contracts have been underresearched, (e) value effects due to capital structure appear to be modest over wide ranges of leverage, (f) estimates of leverage adjustment speeds are biased, and (g) capital structure dynamics have not been adequately considered. Much progress has been made in addressing these issues, some of which has led to the study of an expanded range of capital structure topics, including debt maturity, loan and covenant characteristics, collateral effects, and alternative financing sources such as leasing and credit lines. We conclude by summarizing unanswered questions and areas for future research.

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    Bibliographic Info

    Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

    Volume (Year): 3 (2011)
    Issue (Month): 1 (December)
    Pages: 309-345

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    Handle: RePEc:anr:refeco:v:3:y:2011:p:309-345

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    Related research

    Keywords: capital structure; leverage; trade-off theory; financial contracting; partial adjustment model;

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    Cited by:
    1. Lin, Shannon & Tong, Naqiong & Tucker, Alan L., 2014. "Corporate tax aggression and debt," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 227-241.
    2. Strebulaev, Ilya A. & Yang, Baozhong, 2013. "The mystery of zero-leverage firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(1), pages 1-23.
    3. Zhou, Qing & Faff, Robert & Alpert, Karen, 2014. "Bias correction in the estimation of dynamic panel models in corporate finance," Journal of Corporate Finance, Elsevier, Elsevier, vol. 25(C), pages 494-513.
    4. Colla, Paolo & Ippolito, Filippo & Wagner, Hannes F., 2012. "Leverage and pricing of debt in LBOs," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(1), pages 124-137.
    5. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers, Centre for Finance and Investment, Heriot Watt University 1302, Centre for Finance and Investment, Heriot Watt University.
    6. Thomas Hemmelgarn & Daniel Teichmann, 2013. "Tax Reforms and the Capital Structure of Banks," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 37, Directorate General Taxation and Customs Union, European Commission.
    7. Schmid, Thomas, 2013. "Control considerations, creditor monitoring, and the capital structure of family firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(2), pages 257-272.
    8. Serena Fatica & Thomas Hemmelgarn & Gaetan Nicodeme, 2012. "The Debt-Equity Bias: consequences and solutions," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 33, Directorate General Taxation and Customs Union, European Commission.
    9. Matthias Fahn & Valeria Merlo & Georg Wamser, 2014. "The Commitment Role of Equity Financing," CESifo Working Paper Series 4841, CESifo Group Munich.
    10. Drobetz, Wolfgang & Gounopoulos, Dimitrios & Merikas, Andreas & Schröder, Henning, 2013. "Capital structure decisions of globally-listed shipping companies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 52(C), pages 49-76.

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