To What Extent is Firm Capital Structure “Managed”?


Steven P. Rich, Baylor University

John D. Martin, Baylor University

Steven L. Green, Baylor University


April 2013


ABSTRACT:  Management controls the issuance and repurchase 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) or two-thirds (book) of leverage changes, 2) the higher a firm’s leverage the less any changes in the firm’s leverage ratio stems from management actions, and 3) firms appear to achieve extremely low leverage on purpose but extremely high leverage due to factors beyond management control.