Journal of Finance Vol. 60 No. 6 2005

Do Firms Rebalance Their Capital Structures?

Mark T. Leary^1,2,3; Michael R. Roberts^1,2,3

¹ University of North Carolina at Chapel Hill · ² University of North Carolina Health Care · ³ Duke University

Abstract

We empirically examine whether firms engage in a dynamic rebalancing of their capital structures while allowing for costly adjustment. We begin by showing that the presence of adjustment costs has significant implications for corporate financial policy and the interpretation of previous empirical results. After confirming that financing behavior is consistent with the presence of adjustment costs, we find that firms actively rebalance their leverage to stay within an optimal range. Our evidence suggests that the persistent effect of shocks on leverage observed in previous studies is more likely due to adjustment costs than indifference toward capital structure.

DOI

10.1111/j.1540-6261.2005.00811.x

Volume

60

Issue

6

Pages

2575-2619

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓