Do European Firms Behave as if they Converge toward a Target Capital Structure?

Utilizing a large sample of European firms, we demonstrate that firms behave as if they converge toward a target capital structure (leveraging process), defined by traditional trade-off variables. Moreover, we find that such behavior is evident regardless of firm size and ownership structure. We compare the degree of convergence among different groups of firms and find that medium-sized firms, firms from the new EU member states, and firms from Southern Europe exhibit a stronger leveraging process than the rest of the sampled firms. Our results also highlight that the economic crisis, which began in the late 2008, impacted the leveraging dynamics; however, the general pattern of convergence remained unchanged.