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A New Test of Capital Structure

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  • Colin Mayer
  • Oren Sussman

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 with new equity by small firms. In the process of financing large projects, firms move significantly away from their previous capital structure, as predicted by the pecking order theory. Furthermore, consistent with the pecking order theory, new equity issues are primarily associated with small, loss-making firms. However, we also observe a tendency for firms to adjust back to previous levels of leverage, consistent with a trade-off theory. We conclude that a combination of the pecking order and trade-off theories provides a good description of short-run and longer run dynamics.

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Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2003fe16.

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Date of creation: 2003
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Handle: RePEc:sbs:wpsefe:2003fe16

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  1. 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.
  2. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  3. 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.
  4. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
  5. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  6. 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.
  7. Jeremy C. Stein, 1992. "Convertible Bonds as "Back Door" Equity Financing," NBER Working Papers 4028, National Bureau of Economic Research, Inc.
  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. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, 02.
  10. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. 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.
  13. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  14. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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.
  17. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Tsyplakov, Sergey, 2008. "Investment frictions and leverage dynamics," Journal of Financial Economics, Elsevier, vol. 89(3), pages 423-443, September.
  5. Christopher Polk & Paola Sapienza, 2004. "The Real Effects of Investor Sentiment," NBER Working Papers 10563, National Bureau of Economic Research, Inc.
  6. 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.
  7. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.
  8. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
  9. Langberg, Nisan, 2008. "Optimal financing for growth firms," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 379-406, July.

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