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Capital Structure Dynamics and Transitory Debt
| Venue: | Journal of Financial Economics |
| Citations: | 33 - 5 self |
BibTeX
@ARTICLE{Deangelo_capitalstructure,
author = {Harry Deangelo and Linda Deangelo and Toni M. Whited},
title = {Capital Structure Dynamics and Transitory Debt},
journal = {Journal of Financial Economics},
year = {}
}
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Abstract
This paper develops a model in the spirit of Hennessy and Whited (2005) in which the capital structure dynamics associated with transitory debt fully explain the long-horizon leverage paths documented by Lemmon, Roberts, and Zender (2008). The model shows how and why debt serves as a transitory financing vehicle to meet the funding needs associated with random shocks to investment opportunities. It yields a variety of new testable predictions about the time paths of leverage and the link between investment and capital structure dynamics. Although these dynamics also reflect financing frictions, predictable variation in capital structure primarily reflects the attributes of firms ’ investment opportunities–e.g., the volatility and serial correlation of investment shocks, the marginal profitability of investment, and the nature of capital stock adjustment costs–with the linkage between investment attributes and leverage dynamics reflecting firms ’ usage of transitory debt.
Keyphrases
transitory debt capital structure dynamic firm usage long-horizon leverage path random shock funding need leverage dynamic serial correlation time path firm investment opportunity transitory financing vehicle investment shock investment attribute capital structure predictable variation capital stock adjustment cost marginal profitability new testable prediction investment opportunity
