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.
| Original language | English |
|---|---|
| Pages (from-to) | 1360-1376 |
| Number of pages | 17 |
| Journal | Journal of Corporate Finance |
| Volume | 17 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - Dec 2011 |