Capital Structure Decisions

Murray Z. Frank, Vidhan K. Goyal
2003 Social Science Research Network  
We analyze the impact of production characteristics on capital structure using a sample of worldwide energy utilities. Detailed information on more than 30,000 single power plants enables us to construct different measures for their production flexibility. We find a positive relationship between production flexibility and leverage. Past regulatory changes in the electricity sector allow us to demonstrate causality. Furthermore, analyzing capital market reactions after the collapse of Lehman
more » ... lapse of Lehman Brothers and the coordinated action of international central banks on November 30 th , 2011 yields evidence for a substitution effect between production flexibility and financial flexibility. "We find that the majority of variation in leverage ratios is driven by an unobserved time-invariant effect that generates surprisingly stable capital structures [...] This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time." Lemmon, Roberts and Zender (2008), p.1575
doi:10.2139/ssrn.396020 fatcat:p3dlbgokybgj7lwmymxtzvut54