Initial Growth Status and the Cross Section of Corporate Capital Structure

Description

This project tries to tie leverage persistence to initially identified growth status—a concept based on a two-way sort on firm market-to-book and asset tangibility in early IPO years. Unlike year-by-year market-to-book ratios whose variations can give rise to market timing, the initial measures have the least to do with future market timing. As a result, if economic and market mechanisms are able to keep the cross-sectional pattern of firms largely persistent in terms of growth status, strong relations between initial growth status and future capital structures should help support a pre-determined story. This project will propose a growth-status-determined theory of capital structure, test empirically how strong the relations are between the initial growth status and future capital structures, and run a horse race with the market-timing theory. The results of this project will shed light on whether firm nature or exploitable market timing ultimately dictates corporate capital structure.