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Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure





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    • Michael Lemmon is from Eccles School of Business, University of Utah. Michael Roberts is from the Wharton School, University of Pennsylvania. Jamie Zender is from the Leeds School of Business, University of Colorado. We are especially grateful for helpful comments from our referee and associate editor. We also thank Franklin Allen, Heitor Almeida, Yakov Amihud, Lincoln Berger, Alon Brav, Mark Flannery, Murray Frank, Sara Ghafurian, William Goetzmann, Vidhan Goyal, John Graham, Mark Leary, Andrew Metrick, Roni Michaely, Vinay Nair, Darius Palia, Mitchell Petersen, Rob Stambaugh, Ivo Welch, Toni Whited, Bilge Yilmaz; seminar participants at University of Arizona, Babson College, Boston College, Cornell University, Drexel University, Harvard University, University of Colorado, University of Maryland, University of Michigan, University of North Carolina, University of Pennsylvania, Queens University, the University of Western Ontario; and conference participants at the 2005 Five-Star Conference, 2005 Hong Kong University of Science and Technology Finance Symposium, 2006 NBER Corporate Finance Conference, and 2006 Western Finance Association for helpful discussions. Roberts gratefully acknowledges financial support from a Rodney L. White Grant and an NYSE Research Fellowship.


We find that the majority of variation in leverage ratios is driven by an unobserved time-invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity.