A New Test of Capital Structure
AbstractThis 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 InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2003fe16.
Date of creation: 2003
Date of revision:
Other versions of this item:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-16 (All new papers)
- NEP-CFN-2003-11-16 (Corporate Finance)
- NEP-ENT-2003-11-16 (Entrepreneurship)
- NEP-RMG-2003-11-16 (Risk Management)
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