and Hennessy (2007) highlight that trade-offs between agency problems and risk sharing vary over the business cycle and can result in the observed patterns. Others have related these patterns with asset pricing puzzles. Capital structure persistence Corporate leverage ratios are initially determined. Low relative to high leverage ratios are largely persistent despite time variation. Variation in capital structures is primarily determined by factors that remain stable for long periods of time. These stable factors are unobservable. Growth type compatibility Firms rationally invest and seek financing in a manner compatible with their growth types. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. Distinct growth types are persistent. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist, generating capital structure persistence. Other Capital supply — capital structure also depends on the relative supply of equity vs. debt capital available to the firm. The neutral mutation hypothesis — firms fall into various financing habits that do not impact value. Market timing hypothesis—capital structure is the outcome of the cumulative historical timing of the market by managers. Accelerated investment effect—even in the absence of agency costs, levered firms invest faster because of the existence of default risk. In transition economies, there has been evidence reported unveiling the significant impact of capital structure on firm performance, especially short-term debt such as the case of Vietnamese emerging market economy. Arbitrage A capital structure arbitrageur seeks to profit from differential pricing of various instruments issued by one corporation. Consider, for example, traditional bonds, and convertible bonds. The latter are bonds that are, under contracted-for conditions, convertible into shares of equity. The stock-option component of a convertible bond has a calculable value in itself. The value of the whole instrument should be the value of the traditional bonds plus the extra value of the option feature. If the spread (the difference between the convertible and the non-convertible bonds) grows excessively, then the capital-structure arbitrageur will bet that it will converge. See also Discounted cash flow Enterprise value Financial accounting Financial economics Weighted average cost of capital Hamada's equation Structured finance References Further reading External links Dinesh Gajurel, "Capital Structure Management in Nepalese Enterprises," 2005. Roy L. Simerly