Premium
Do Firms Rebalance Their Capital Structures?
Author(s) -
LEARY MARK T.,
ROBERTS MICHAEL R.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00811.x
Subject(s) - leverage (statistics) , capital structure , economics , monetary economics , capital (architecture) , empirical evidence , cost of capital , business , finance , microeconomics , debt , philosophy , archaeology , epistemology , machine learning , computer science , history , profit (economics)
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.