Extant empirical research on firms' adjustment to their optimal capital structures
is cross-sectional. However, Scholes and Wolfson (1989) argue that refinancing costs
that accumulate with age increasingly impede firms from restoring their optimal capital
structures. This study provides evidence on the time-series variation in the rate
at which firms move toward their leverage targets that is consistent with this prediction.
In separate tests, age is measured from two dates—from firms' initial public
offerings and from their incorporation—to examine whether the duration of their
public and private experience, respectively, affect the evolution in financial policies.
This paper contributes to the literature by developing a research design that isolates
the influence of dynamic refinancing costs on the leverage adjustment problem. The
evidence also justifies future research on Scholes and Wolfson's (1989) predictions
about the time-series pattern in firms' tax shields by empirically validating that
refinancing costs increasingly constrain their capital structures.