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A New Test of Capital Structure

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  • Mayer, Colin
  • Sussman, Oren

Abstract

This Paper reports a new test of capital structure theories. It uses a filtering technique to identify large investment spikes. We find that the spikes are predominantly financed with debt by large firms and by new equity by small loss-making firms. In the process, firms move significantly away from their previous capital structures but then revert back to them by making frequent issues of small amounts of equity. Neither the pecking order nor the trade-off theories on their own provide satisfactory descriptions of these dynamic features of corporate financing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4239.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4239

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Keywords: capital structure; corporate finance; pecking order; trade-off theory;

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References

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  1. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  2. Chirinko, Robert S. & Singha, Anuja R., 2000. "Testing static tradeoff against pecking order models of capital structure: a critical comment," Journal of Financial Economics, Elsevier, vol. 58(3), pages 417-425, December.
  3. Jeremy C. Stein, 1992. "Convertible Bonds as "Back Door" Equity Financing," NBER Working Papers 4028, National Bureau of Economic Research, Inc.
  4. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
  5. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
  6. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  7. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, 02.
  8. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
  9. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
  10. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  11. Corbett, Jenny & Jenkinson, Tim, 1997. "How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 69-93, Supplemen.
  12. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  13. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  14. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc.
  15. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  16. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  17. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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Citations

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Cited by:
  1. Henrique S. Basso and Javier Coto-Martinez, Yunus Aksoy,, 2010. "Lending Relationships and Monetary Policy," Working Paper Series 2009:18, Uppsala University, Department of Economics, revised 21 Jan 2010.
  2. Polk, Christopher & Sapienza, Paola, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
  3. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
  4. Langberg, Nisan, 2008. "Optimal financing for growth firms," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 379-406, July.
  5. Guriev, Sergei & Kvasov, Dmitriy, 2009. "Imperfect competition in financial markets and capital structure," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 131-146, October.
  6. Tsyplakov, Sergey, 2008. "Investment frictions and leverage dynamics," Journal of Financial Economics, Elsevier, vol. 89(3), pages 423-443, September.
  7. Laura Onofri & Antonello Scorcu, 2006. "The Life Cycle of Temporary Cultural Exhibitions: An Empirical Exploration," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(3), pages 447-460.
  8. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, vol. 99(2), pages 235-261, February.
  9. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.

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