Is the Stability of Leverage Ratios Determined by the Stability of the Economy?

CERGE-EI Working Paper Series No. 393

33 Pages Posted: 9 Nov 2009

Date Written: September 1, 2009

Abstract

The choice of capital structure by firms is a fundamental issue in financial literature. According to a recent finding, the capital structure of firms remains almost unchanged during their lives meaning that leverage ratios are significantly stable over time. The stability of leverage ratios is mainly generated by an unobserved firm-specific effect that is liable for the majority of variation in capital structure (Lemmon, Roberts, and Zender 2008). However, the study focuses on the US economy, which is relatively stable. I study how substantial changes in the economy affect the stability of firms' capital structure in transition countries. Specifically, I concentrate on Central and Eastern European economies that passed through transition from central planning to a market economy and privatization, the Russian financial crisis, and EU membership. In addition, I investigate whether the ownership structure of firms is responsible for the part of the unexplained variation in leverage.

Keywords: Capital Structure, Financing Decisions, Eastern Europe

JEL Classification: G32, C23

Suggested Citation

Shamshur, Anastasiya, Is the Stability of Leverage Ratios Determined by the Stability of the Economy? (September 1, 2009). CERGE-EI Working Paper Series No. 393, Available at SSRN: https://ssrn.com/abstract=1502827 or http://dx.doi.org/10.2139/ssrn.1502827

Anastasiya Shamshur (Contact Author)

University of Kent ( email )

Sibson
Canterbury, Kent CT2 7NZ
United Kingdom

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