IDEAS home Printed from https://ideas.repec.org/a/wsi/qjfxxx/v05y2015i03ns2010139215500081.html
   My bibliography  Save this article

Firm Size and Capital Structure

Author

Listed:
  • Alexander Kurshev

    (XTX Markets, Leconfield House Curzon Street, London W1J 5JA, UK)

  • Ilya A. Strebulaev

    (Graduate School of Business, Stanford University, USA3National Bureau of Economic Research, USA)

Abstract

Firm size has been empirically found to be strongly positively related to capital structure. This paper investigates whether a dynamic capital structure model can explain the cross-sectional size–leverage relationship. The driving force that we consider is the presence of fixed costs of external financing that lead to infrequent restructuring and create a wedge between small and large firms. We find four firm-size effects on leverage. Small firms choose higher leverage at the moment of refinancing to compensate for less frequent rebalancings. Their longer waiting times between refinancings lead to lower levels of leverage at the end of restructuring periods. Within one refinancing cycle, the intertemporal relationship between leverage and firm size is negative. Finally, there is a mass of firms opting for no leverage. The analysis of dynamic economy demonstrates that in cross-section, the relationship between leverage and size is positive and thus fixed costs of financing contribute to the explanation of the stylized size–leverage relationship. However, the relationship changes sign when we control for the presence of unlevered firms.

Suggested Citation

  • Alexander Kurshev & Ilya A. Strebulaev, 2015. "Firm Size and Capital Structure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-46, September.
    • Handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:03:n:s2010139215500081
    DOI: 10.1142/S2010139215500081
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010139215500081
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2010139215500081?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    2. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. "On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-878, July.
    3. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    4. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    5. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    6. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, August.
    7. Dirk Hackbarth & Christopher A. Hennessy & Hayne E. Leland, 2007. "Can the Trade-off Theory Explain Debt Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1389-1428, 2007 04.
    8. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    9. Christensen, Peter Ove & Flor, Christian Riis & Lando, David & Miltersen, Kristian R., 2014. "Dynamic capital structure with callable debt and debt renegotiations," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 644-661.
    10. Mauer, David C & Triantis, Alexander J, 1994. "Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework," Journal of Finance, American Finance Association, vol. 49(4), pages 1253-1277, September.
    11. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    12. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    13. Schaefer, Stephen M. & Strebulaev, Ilya A., 2008. "Structural models of credit risk are useful: Evidence from hedge ratios on corporate bonds," Journal of Financial Economics, Elsevier, vol. 90(1), pages 1-19, October.
    14. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    15. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
    16. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
    17. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    18. Kim, Dongcheol & Palia, Darius & Saunders, Anthony, 2008. "The Impact of Commercial Banks on Underwriting Spreads: Evidence from Three Decades," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(4), pages 975-1000, December.
    19. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. DIONISIJEV, Ivan, 2021. "The Audit Opinion In The Role Of Stock Prices Fluctuations On The Macedonian Stock Exchange," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 25(3), pages 29-43, September.
    2. Samuel Jebaraj Benjamin & Zhuoan Feng & Pallab Kumar Biswas, 2023. "Negative Social Media Sentiments and Capital Structure," Capital Markets Review, Malaysian Finance Association, vol. 31(2), pages 1-22.
    3. Quang Minh Nguyen, 2023. "Impact of privatization on firm performance in Vietnam: A Staggered Difference-in-Differences analysis with heterogeneous treatment effects," Documentos de Trabajo EH-Valencia (DT-EHV) 2303, Economic History group at the Universitat de Valencia.
    4. Bergin, Paul R. & Feng, Ling & Lin, Ching-Yi, 2021. "Trade and firm financing," Journal of International Economics, Elsevier, vol. 131(C).
    5. N. R. Ramírez-Rondán, 2019. "Balance sheet and currency mismatch: evidence for Peruvian firms," Empirical Economics, Springer, vol. 57(2), pages 449-473, August.
    6. Thi-Hanh Vu & Van-Duy Nguyen & Manh-Tung Ho & Quan-Hoang Vuong, 2019. "Determinants of Vietnamese Listed Firm Performance: Competition, Wage, CEO, Firm Size, Age, and International Trade," JRFM, MDPI, vol. 12(2), pages 1-19, April.
    7. Aastvedt, Tonje Marthinsen & Behmiri, Niaz Bashiri & Lu, Li, 2021. "Does green innovation damage financial performance of oil and gas companies?," Resources Policy, Elsevier, vol. 73(C).
    8. Michaël Dewally & Susan M.V. Flaherty & Yingying Shao, 2017. "Determinants of financial policy in the hospitality sector in the United States," Tourism Economics, , vol. 23(3), pages 523-542, May.
    9. Baek, Chaeyoon & Baek, Seungho & Glambosky, Mina, 2024. "Macroeconomic impact and stock returns' vulnerability by size, solvency, and financial distress," Finance Research Letters, Elsevier, vol. 59(C).
    10. Syed Danial Hashmi & Saqib Gulzar & Zeshan Ghafoor & Iram Naz, 2020. "Sensitivity of firm size measures to practices of corporate finance: evidence from BRICS," Future Business Journal, Springer, vol. 6(1), pages 1-19, December.
    11. Quoc Trung Nguyen Kim, 2023. "Does COVID-19 affect small and medium enterprises’ capital structure in vietnam?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(1), pages 2190268-219, December.
    12. Bipin Sony & Saumitra Bhadurib, 2020. "Information asymmetry and the choice between rights issue and private placement of equity," BASE University Working Papers 01/2020, BASE University, Bengaluru, India.
    13. Todd Mitton, 2022. "Methodological Variation in Empirical Corporate Finance," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 527-575.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, August.
    2. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    3. Erwan Morellec & Philip Valta & Alexei Zhdanov, 2015. "Financing Investment: The Choice Between Bonds and Bank Loans," Management Science, INFORMS, vol. 61(11), pages 2580-2602, November.
    4. Benzoni, Luca & Garlappi, Lorenzo & Goldstein, Robert S. & Ying, Chao, 2022. "Debt dynamics with fixed issuance costs," Journal of Financial Economics, Elsevier, vol. 146(2), pages 385-402.
    5. Danis, András & Rettl, Daniel A. & Whited, Toni M., 2014. "Refinancing, profitability, and capital structure," Journal of Financial Economics, Elsevier, vol. 114(3), pages 424-443.
    6. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    7. Patrick Bolton & Ye Li & Neng Wang & Jinqiang Yang, 2020. "Dynamic Banking and the Value of Deposits," NBER Working Papers 28298, National Bureau of Economic Research, Inc.
    8. Erwan Morellec & Boris Nikolov & Norman Schürhoff, 2012. "Corporate Governance and Capital Structure Dynamics," Journal of Finance, American Finance Association, vol. 67(3), pages 803-848, June.
    9. Lotfaliei, Babak, 2018. "The variance risk premium and capital structure," ESRB Working Paper Series 70, European Systemic Risk Board.
    10. Tserlukevich, Yuri, 2008. "Can real options explain financing behavior?," Journal of Financial Economics, Elsevier, vol. 89(2), pages 232-252, August.
    11. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    12. Lipson, Marc L. & Mortal, Sandra, 2009. "Liquidity and capital structure," Journal of Financial Markets, Elsevier, vol. 12(4), pages 611-644, November.
    13. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    14. Lyandres, Evgeny, 2010. "Target leverage and the costs of issuing seasoned equity," Finance Research Letters, Elsevier, vol. 7(1), pages 39-52, March.
    15. bag, DINABANDHU, 2013. "Market Leverage Of Real Estate Firms In India: Empirical Study," OSF Preprints 3d7v4, Center for Open Science.
    16. Hennessy, Christopher A. & Kasahara, Akitada & Strebulaev, Ilya A., 2020. "Empirical analysis of corporate tax reforms: What is the null and where did it come from?," Journal of Financial Economics, Elsevier, vol. 135(3), pages 555-576.
    17. Li, Jay Y. & Mauer, David C., 2016. "Financing uncertain growth," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 241-261.
    18. Norman Schurhoff, 2004. "Capital gains taxes, irreversible investment, and capital structure," 2004 Meeting Papers 592b, Society for Economic Dynamics.
    19. Luca Benzoni & Lorenzo Garlappi & Robert S. Goldstein & Julien Hugonnier & Chao Ying, 2020. "Optimal Debt Dynamics, Issuance Costs, and Commitment," Working Paper Series WP-2020-20, Federal Reserve Bank of Chicago.
    20. Antill, Samuel & Grenadier, Steven R., 2019. "Optimal capital structure and bankruptcy choice: Dynamic bargaining versus liquidation," Journal of Financial Economics, Elsevier, vol. 133(1), pages 198-224.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:03:n:s2010139215500081. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/qjf/qjf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.