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Capital Review of Structure

In: Business and Management

Submitted By sumniel
Words 32172
Pages 129
Foundations and Trends R in Finance Vol. 3, No. 1 (2008) 1–93 c 2009 C. Parsons and S. Titman DOI: 10.1561/0500000018

Empirical Capital Structure: A Review
Christopher Parsons1 and Sheridan Titman2
1 2

University of North Carolina at Chapel Hill, USA, Chris Parsons@kenan-flagler.unc.edu University of Texas at Austin, USA, Sheridan.Titman@mccombs.utexas.edu

Abstract
This survey provides a synthesis of the empirical capital structure literature. Our synthesis is divided into three parts. The first part examines the evidence that relates to the cross-sectional determinants of capital structure. This literature identifies and discusses the characteristics of firms that tend to be associated with different debt ratios. In the second part, we review the literature that examines changes in capital structure. The papers in this literature explore factors that move firms away from their target capital structures as well as the extent to which future financing choices move firms back toward their targets. Finally, we complete our review with a set of studies that explore the consequences of leverage, rather than its determinants. These studies are concerned with feedback from financing to real decisions. For example, we explore how a firm’s financing choices influences its incentive to invest in its workers, price its products, form relationships with suppliers, or compete aggressively with competitors.

1
Introduction

Corporations fund their operations by raising capital from a variety of distinct sources. The mix between the various sources, generally referred to as the firm’s capital structure, has attracted considerable attention from both academics and practitioners. The empirical capital structure literature explores both the cross-sectional determinants of capital structure as well as time-series changes. This survey reviews both aspects of this literature. Our...

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