More Frequent Than You Think: Revisiting Capital Structure Adjustment

This paper revisits the empirical evidence on capital structure adjustment and the prevalence of financing “inaction.” We show that the conclusion of infrequent leverage adjustment is sensitive to two methodological choices: high adjustment thresholds and reliance on net balance-sheet changes. Using lower thresholds and gross flows from cash-flow statements, we find adjustment is far more frequent than previously documented, and the pattern reveals pronounced size-based heterogeneity. Smaller firms exhibit considerable inertia consistent with fixed costs; the largest firms (e.g., top 1% by assets) behave as if frictions are negligible. Frictionless recapitalization models thus better describe large-firm leverage dynamics.