Firm Size and Capital Structure

Alexander Kurshev and Ilya A. Strebulaev
Additional contact information
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

Quarterly Journal of Finance (QJF), 2015, vol. 05, issue 03, 1-46

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.

Keywords: Capital structure; leverage; firm size; transaction costs; default; dynamic programming; dynamic economy; refinancing point; zero-leverage (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139215500081
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:05:y:2015:i:03:n:s2010139215500081

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139215500081

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().