Capital Structure Stability in Tehran Stock Exchange

Cross-sectional stability of the leverage means that a firm’s current high or low leverage (relative to other firms) reliably predicts a comparable relative position in future cross-sections. The extent of stability in the cross-section is gauged by assessing the explanatory power of the current cross-section for future cross-sections going forward one year at a time and extending well into the future. This study examines the stability of leverage for 113 componies in Tehran Stock Exchange over the period 1999–2012. It conducts simulations that gauge the ability of random financing and a variety of leverage targeting models to replicate the instability of the crosssection over long horizons. The results show instability in leverage ratios. Target leverage models do a good job replicating the substantial instability of the actual leverage cross-section.