The Dynamics of Capital Structure Decisions

36 Pages Posted: 21 Oct 2014

See all articles by Paula Antão

Paula Antão

Bank of Portugal - Department of Economics

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Date Written: October 20, 2014

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.

Keywords: Leverage, Trade-off theory, Duration Analysis

JEL Classification: G32

Suggested Citation

Antão, Paula and Bonfim, Diana, The Dynamics of Capital Structure Decisions (October 20, 2014). Available at SSRN: https://ssrn.com/abstract=2512249 or http://dx.doi.org/10.2139/ssrn.2512249

Paula Antão (Contact Author)

Bank of Portugal - Department of Economics ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

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