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Target Behavior and Financing: How Conclusive Is the Evidence?

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  • XIN CHANG
  • SUDIPTO DASGUPTA

Abstract

The notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance. Yet, how definitive is the evidence? We address this issue by generating samples where financing is unrelated to a firm's current debt ratio or a target. We find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples. Taken together, our findings suggest that a number of existing tests of target behavior have no power to reject alternatives. Copyright (c) 2009 the American Finance Association.

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  • Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
  • Handle: RePEc:bla:jfinan:v:64:y:2009:i:4:p:1767-1796
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