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Firm growth type and capital structure persistence

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  • Wu, Xueping
  • Au Yeung, Chau Kin

Abstract

We find that growth type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously predict significantly dispersed and persistently distinct future leverage ratios. Growth type is persistent; growth-type-sorted cross-sections of corporate fundamental variables (such as tangible versus intangible investment style) are also meaningfully persistent. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. These findings demonstrate that firms rationally invest and seek financing in a manner compatible with their growth types. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist. Growth type is apparently a fundamental factor for capital structure persistence.

Suggested Citation

  • Wu, Xueping & Au Yeung, Chau Kin, 2012. "Firm growth type and capital structure persistence," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3427-3443.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3427-3443
    DOI: 10.1016/j.jbankfin.2012.08.008
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    6. Shen, Jianfu & Firth, Michael & Poon, Winnie P.H., 2016. "Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 16-27.
    7. Hasan Ayaydin & Pinar Hayaloglu, 2014. "The Effect of Corruption on Firm Growth: Evidence from Firms in Turkey," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(5), pages 607-624, May.
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    10. Giorgio Canarella & Stephen M. Miller, 2017. "The Determinants of Growth in the Information and Communication Technology (ICT) Industry: A Firm-Level Analysis," Working papers 2017-12, University of Connecticut, Department of Economics.

    More about this item

    Keywords

    Capital structure; Persistence; Growth type; Investment style; Financing behavior; Growth type compatibility;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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