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

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Listed:
  • 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)

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.

Suggested Citation

  • John R. Graham & Mark T. Leary, 2011. "A Review of Empirical Capital Structure Research and Directions for the Future," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 309-345, December.
  • Handle: RePEc:anr:refeco:v:3:y:2011:p:309-345
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-102710-144821
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    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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