Cyclical capital structure decisions

Abstract

Past literature has documented clear trends in the leverage ratio and other capital structure choices made by US firms. We expand this line of research by showing that aggregate capital structure ratios of US firms, during the last decades, are characterised not only by time trends but also by clear cycles. We set the start and end dates of these cycles using a ‘classical approach’. The cycles relating to the ratio of new shares versus debt are shorter and are more intense than the cycles regarding the term of the new debt obligations. The cycles that describe the ratio of retained earnings versus new equity issues are wider in relative terms and with similar duration to the cycles of decisions on external versus internal financing. This means that the decision to substitute debt for shares (or vice versa) is much more common, frequent and significant, than the decision term debt.