Capital structures of surviving Fortune 500 companies: A retrospective analysis for the past seven decades

  • Received December 1, 2023;
    Accepted January 18, 2024;
    Published January 30, 2024
  • Author(s)
  • DOI
  • Article Info
    Volume 21 2024, Issue #1, pp. 98-115
  • Cited by
    1 articles

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

Sixty companies on the inaugural “Fortune 500” list still remained on this list in 2020 and they have monotonically increased their leverage (median debt to total assets ratio rose from 0.5% to 20.4%) over the past 70 years. This study applies factors from classic capital structure theories to this sample and explains the dynamic choice of debt usage. The methods employed include a Bayesian information criterion selection process of explanatory variables and a set of pooled cross section and panel tests with 3,536 firm-year observations. The tests use an array of factors extracted from several established theories on capital structure, including general economic growth, tax rate, interest rate and many company-specific variables proxying profitability and growth opportunities. The firm-level results first provide support to the free cash flow theory and confirm that company size and fixed assets proportion are the two factors associated with increased borrowing. Firms in the sample also actively respond to certain debt market and macroeconomic conditions, and their leverage ratio is significantly associated with credit spread and real interest rate. Further tests across subperiods and with risk measures illustrate the impact of expected inflation, investments activities, and stock volatility, providing supporting evidence to the organizational theory. The main research conclusion is that large US companies adopt a balance sheet-based approach to increase the use of debt, and they stay sensitive and versatile to market conditions and risk landscape.

The author declares no financial or personal relationships with other people or organizations that could inappropriately influence my work. The author thanks the journal editor and anonymous referees, Ahmad Etebari, Fred Kaen, discussants and participants at the Northeast Business and Economics Association 2022 annual meeting and the 2023 Global Finance Conference for their constructive critiques. All errors remain my responsibility.

view full abstract hide full abstract
    • Figure 1. Trends of median leverage ratios
    • Figure 2. Median leverage and tax rates
    • Figure 3. Median leverage and before-tax profitability
    • Figure 4. Mean asset size (2005 constant dollars) vs. mean long-term debt
    • Figure 5. Cost of capital
    • Table 1. Descriptive statistics of firm variables
    • Table 2. Mean statistics of macroeconomic variables
    • Table 3. Firm factors associated with leverage
    • Table 4. Firm factors and macroeconomic conditions: book value-based leverage
    • Table 5. Firm factors and macroeconomic conditions: market value-based leverage
    • Table 6. Determinants of leverage across subperiods
    • Table 7. Further exploration of firm-specific factors
    • Conceptualization
      Wenjuan Xie
    • Data curation
      Wenjuan Xie
    • Formal Analysis
      Wenjuan Xie
    • Investigation
      Wenjuan Xie
    • Methodology
      Wenjuan Xie
    • Project administration
      Wenjuan Xie
    • Resources
      Wenjuan Xie
    • Software
      Wenjuan Xie
    • Supervision
      Wenjuan Xie
    • Validation
      Wenjuan Xie
    • Visualization
      Wenjuan Xie
    • Writing – original draft
      Wenjuan Xie
    • Writing – review & editing
      Wenjuan Xie