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An Explicit Test for Capital Structure Convergence

Angelos A. Antzoulatos

University of Piraeus - Department of Banking and Financial Management

Kostas Koufopoulos

University of Warwick - Finance Group

Costas Lambrinoudakis

University of Piraeus - Department of Banking and Financial Management

Emmanuel D. Tsiritakis

University of Piraeus

February 12, 2011

Midwest Finance Association 2012 Annual Meetings Paper

Abstract:     
We employ the panel convergence methodology developed by Phillips and Sul (2007) to test for leverage convergence across a set of US firms. There is no convergence detected when the whole sample is tested. However, we detect convergence clubs, i.e. subgroups of convergent firms. There is one big club detected, comprising about 70% of the whole sample, and many small ones. The convergence within the big club and most of the small ones happens in rates, i.e. leverage has the same rate of change across the firms of a club. Firms belonging to the big club are bigger, more profitable, have more tangible assets, fewer growth opportunities and higher payout ratios than the rest of the firms. In addition, they exhibit counter-cyclical leverage over the business cycle, while the rest of the firms’ leverage is not sensitive to changes in macroeconomic conditions. Given that these are distinctive characteristics of financially unconstrained firms, these results imply that firms belonging to the big club are financially unconstrained, while the rest of the firms are financially constrained. Our contribution to the ongoing debate for the existence of convergence among firms’ leverage is twofold: (i) to obtain our results, we do not impose any of the direct or indirect restrictions used in the existing literature and so we avoid all pitfalls associated with them and (ii) we can distinguish constrained from unconstrained firms, without having to employ any of the classification criteria used in the literature.
Number of Pages in PDF File: 23