A stubborn persistence: is the stability of leverage ratios determined by the stability of the economy?

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.

Keywords

• capital structure
• financing decisions
• Eastern Europe