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The dynamics of capital structure decisions

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  • Diana Bonfim
  • Paula Antão

Abstract

In this paper we explore the process of convergence to firms’ target leverage ratios. Using a unique dataset of micro, small, medium and large firms, we find that this process is very fast, most notably for smaller firms. We further explore these results by analyzing different convergence trajectories. We find that firms that are currently below their target leverage ratio take more time to reach this target than firms with a symmetrical departure point. Furthermore, smaller firms are able to converge faster to their optimal capital structure, regardless of whether they have to increase or decrease their current leverage ratios. Using a duration analysis framework, we also find that firms that have to increase debt to reach their target leverage ratio take more time to do so if they have more free cash-flow.

Suggested Citation

  • Diana Bonfim & Paula Antão, 2012. "The dynamics of capital structure decisions," Working Papers w201206, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201206
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    References listed on IDEAS

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    3. Pacheco, Luís, 2016. "Capital structure and internationalization: The case of Portuguese industrial SMEs," Research in International Business and Finance, Elsevier, vol. 38(C), pages 531-545.

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    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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