Corporate Capital Structure Actions

Abstract

This paper is a study of the financing actions by firms to adjust leverage: debt reductions, stock sales, debt issues, and stock purchases. Each type of action is positively autocorrelated. The standard empirical models of corporate leverage produce leverage targets that do not correctly predict actual debt issues and stock sales. Firm-specific time-series regressions with the logarithm of firm assets and market-to-book as regressors, correctly predict these patterns. The estimates imply that on average firms adjust toward their target much faster than generally understood, closing about half of the leverage gap in a year.