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Capital Structure and Stock Returns

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Author Info
Ivo Welch () (International Center for Finance)

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Abstract

U.S. corporations do not use their debt and equity issuing and repurchasing activities to counteract the mechanistic effects of stock returns on their debt equity ratios. Thus, over 1–5 year horizons, stock returns can explain about 40% of debt ratio dynamics. Although corporate (net) issuing activity is lively, and although it can explain the remaining 60% of debt ratio dynamics (long-term debt issuing activity being most capital structure relevant), corporate issuing motives remain largely a mystery. When stock returns are accounted for, taxes, bankruptcy costs, and many other proxies used in the literature, play at best a very modest role in explaining capital structure.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm263.

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Date of creation: 25 Jan 2002
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Handle: RePEc:ysm:somwrk:ysm263

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G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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