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Dynamic Capital Structure Choice: Theory and Tests

  • Fischer, Edwin O
  • Heinkel, Robert
  • Zechner, Josef

This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The theory provides the optimal dynamic recapitalization policy as a function of firm-specific characteristics. The authors find that even small recapitalization costs lead to wide swings in a firm's debt ratio over time. Rather than static leverage measures, they use the observed debt ratio range of a firm as an empirical measure of capital structure relevance. The results of empirical tests relating firms' debt ratio range to firm-specific features strongly support the theoretical model of relevant capital structure choice in a dynamic setting. Copyright 1989 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 44 (1989)
Issue (Month): 1 (March)
Pages: 19-40

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Handle: RePEc:bla:jfinan:v:44:y:1989:i:1:p:19-40
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