To What Extent Do Firms Manage Capital Structure Changes?

Abstract

Management controls the issuing and repurchasing of securities, but they have no direct control over leverage changes stemming from changes in stock price or from profits and losses. By separating managed from unmanaged changes in leverage ratios, we draw three basic conclusions: 1) management only controls one-half (market) to two-thirds (book) of leverage changes, 2) the higher a firm’s leverage the less any changes in the firm’s leverage stems from management’s actions, and 3) firms appear to achieve extremely low leverage on purpose but extremely high leverage due to factors beyond management’s direct control.