Abstract
I provide further evidence on the determinants of corporate capital structure by estimating a dynamic trade-off model of the firm that includes investment, leverage, and payout decisions. The structural model generates a leverage ratio that oscillates around a long-run, time-invariant level and consistently reproduces the convergence and stability of leverage reported by Lemmon, Roberts, and Zender (2008). The dynamic model sheds light on the role played by the primitive characteristics of the firm (e.g., production technology) to explain the cross-sectional variation in capital structure. I use Efficient Method of Moments (EMM) to recover the structural parameters.
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