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A stubborn persistence: Is the stability of leverage ratios determined by the stability of the economy?

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  • Hanousek, Jan
  • Shamshur, Anastasiya

Abstract

The choice of capital structure firms make is a fundamental issue in the financial literature. According to a recent finding, the capital structure of firms remains almost unchanged during their lives. This stability of leverage ratios is mainly generated by an unobserved firm-specific effect that is liable for the majority of the variation in capital structure. We demonstrate that even substantial changes in the economic environment do not affect the stability of firms' leverage due to the presence of credit constraints. Financially unconstrained firms are more responsive to economic changes and adjust to the target substantially faster than constrained firms. Moreover, accounting for the ownership structure of firms boosts the explanatory power of the model in the subsample of unconstrained firms, suggesting that annual information on ownership and ownership changes together with financial constraints have the potential to be an answer to the puzzle of stability in capital structure.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 5 ()
Pages: 1360-1376

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Handle: RePEc:eee:corfin:v:17:y:2011:i:5:p:1360-1376

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Capital structure; Financing decisions; Eastern Europe;

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Cited by:
  1. Paula Antão & Diana Bonfim, 2012. "The dynamics of capital structure decisions," Working Papers w201206, Banco de Portugal, Economics and Research Department.
  2. Mariya Hake, 2012. "Banking Sector Concentration and Firm Indebtedness: Evidence from Central and Eastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 48-68, August.
  3. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.

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