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Firm Specific Determinants of Capital Structure - Is Firm's Leverage Determined as a Residual of other Financial Decisions?

Schomaker, Niklas LU and Riebler, Daniel LU (2018) NEKN02 20181
Department of Economics
Abstract
This thesis empirically investigates the question if US firm’s capital structures are stable over longer periods of time and which firm characteristics drive optimal leverage. The analysis is based on a Compustat panel data sample consisting of 2,900 US firms between 1985 and 2016. After analyzing the stability of firm’s capital structure via a “narrow band” and a “relative bucket approach” an error correction model is used to measure the speed of adjustment towards a moving optimal target of leverage. The thesis finds that firms capital structures are far away from being stable. Furthermore, trade-off theory and pecking order hypothesis are not able to fully explain the evolution of leverage in the data sample. The remarkable finding is... (More)
This thesis empirically investigates the question if US firm’s capital structures are stable over longer periods of time and which firm characteristics drive optimal leverage. The analysis is based on a Compustat panel data sample consisting of 2,900 US firms between 1985 and 2016. After analyzing the stability of firm’s capital structure via a “narrow band” and a “relative bucket approach” an error correction model is used to measure the speed of adjustment towards a moving optimal target of leverage. The thesis finds that firms capital structures are far away from being stable. Furthermore, trade-off theory and pecking order hypothesis are not able to fully explain the evolution of leverage in the data sample. The remarkable finding is that leverage seems to be mainly determined as a residual of other financial decisions (investment and payout) as long as leverage is in an acceptable target zone around its optimum. Outside this range, the speed of adjustment significantly increases pushing leverage back to its optimal level. Another notable finding is, that credit rating downgrades work well to specify an upper border of firm’s leverage target zones encouraging the assumption that managers target credit ratings instead of optimal leverage ratios. (Less)
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author
Schomaker, Niklas LU and Riebler, Daniel LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Stability of Capital Structure, Leverage Determinants, Financial Deficit, Credit Ratings, Error Correction Model
language
English
id
8946386
date added to LUP
2018-07-02 15:41:23
date last changed
2018-07-02 15:41:23
@misc{8946386,
  abstract     = {This thesis empirically investigates the question if US firm’s capital structures are stable over longer periods of time and which firm characteristics drive optimal leverage. The analysis is based on a Compustat panel data sample consisting of 2,900 US firms between 1985 and 2016. After analyzing the stability of firm’s capital structure via a “narrow band” and a “relative bucket approach” an error correction model is used to measure the speed of adjustment towards a moving optimal target of leverage. The thesis finds that firms capital structures are far away from being stable. Furthermore, trade-off theory and pecking order hypothesis are not able to fully explain the evolution of leverage in the data sample. The remarkable finding is that leverage seems to be mainly determined as a residual of other financial decisions (investment and payout) as long as leverage is in an acceptable target zone around its optimum. Outside this range, the speed of adjustment significantly increases pushing leverage back to its optimal level. Another notable finding is, that credit rating downgrades work well to specify an upper border of firm’s leverage target zones encouraging the assumption that managers target credit ratings instead of optimal leverage ratios.},
  author       = {Schomaker, Niklas and Riebler, Daniel},
  keyword      = {Stability of Capital Structure,Leverage Determinants,Financial Deficit,Credit Ratings,Error Correction Model},
  language     = {eng},
  note         = {Student Paper},
  title        = {Firm Specific Determinants of Capital Structure - Is Firm's Leverage Determined as a Residual of other Financial Decisions?},
  year         = {2018},
}