Firm growth type and capital structure persistence

Xueping Wu and Chau Kin Au Yeung

Journal of Banking & Finance, 2012, vol. 36, issue 12, 3427-3443

Abstract: We find that growth type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously predict significantly dispersed and persistently distinct future leverage ratios. Growth type is persistent; growth-type-sorted cross-sections of corporate fundamental variables (such as tangible versus intangible investment style) are also meaningfully persistent. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. These findings demonstrate that firms rationally invest and seek financing in a manner compatible with their growth types. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist. Growth type is apparently a fundamental factor for capital structure persistence.

Keywords: Capital structure; Persistence; Growth type; Investment style; Financing behavior; Growth type compatibility (search for similar items in EconPapers)
JEL-codes: G14 G32 G34 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:12:p:3427-3443

DOI: 10.1016/j.jbankfin.2012.08.008

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