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.

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