On the nature of corporate capital structure persistence and convergence*

Lemmon, Roberts, and Zender (2008) provide evidence suggesting that corporate capital structures are surprisingly persistent; that firm fixed effects account for a significant portion of the observed variation in corporate capital structures; and that there is a pattern of convergence of corporate capital structures over event time. We argue that Lemmon, Roberts, and Zender’s evidence is consistent with corporate capital structures following a nonlinear process, dictated in part by the definition of capital structure and in part by the growth pattern of firms. We find evidence consistent with these arguments. Specifically, we provide evidence that corporate capital structures follow a nonlinear process that is also followed by their determinants and that unobserved firm heterogeneity (fixed effects) is less important and prior explanatory variables are more important than suggested by Lemmon, Roberts, and Zender’s evidence.