Do Firms Rebalance Their Capital Structures?




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    • Mark Leary is at The Fuqua School of Business, Duke University and Michael Roberts is at The Wharton School, University of Pennsylvania. We thank Malcolm Baker, Michael Bradley, Qi Chen, Murray Frank, David Hsieh, Roni Michaely, Sendhil Mullainathan, Mitchell Petersen, Gordon Phillips, Emma Rasiel, Oded Sarig, Robert Stambaugh (the editor), Karin Thorburn, Vish Viswanathan, Jose Wynne; seminar participants at Duke University, Harvard University, Interdisciplinary Center of Herzliya, University of North Carolina at Chapel Hill, University of Pennsylvania; participants at the 2003 Financial Economics and Accounting Conference, the 2004 Econometric Society Meetings, the 2004 Southwestern Finance Association, the 2004 Midwest Finance Association, the 2004 Utah Winter Finance Conference, the 2004 Western Finance Association, the 2004 Tuck Corporate Finance Conference; and especially an anonymous referee, Alon Brav, and John Graham for helpful comments.


We empirically examine whether firms engage in a dynamic rebalancing of their capital structures while allowing for costly adjustment. We begin by showing that the presence of adjustment costs has significant implications for corporate financial policy and the interpretation of previous empirical results. After confirming that financing behavior is consistent with the presence of adjustment costs, we find that firms actively rebalance their leverage to stay within an optimal range. Our evidence suggests that the persistent effect of shocks on leverage observed in previous studies is more likely due to adjustment costs than indifference toward capital structure.