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Further Evidence on Debt-Equity Choice

  • Philippe GAUD

    (HEC - University of Geneva)

  • Martin HOESLI

    (HEC - University of Geneva, FAME and University of Aberdeen (School of Business))

  • André BENDER

    (HEC - University of Geneva & FAME)

Using a large sample of 5,365 European firms,we document the driving factors of debt-equity choices. Adjustments to a target debt level play a modest role except when debt exceeds an upper barrier, a result that underlines the importance of debt capacity. Preference for internal financing, leverage deficit prior to equity issues, as well as a high level of slack of firms seeking to reduce equity constitute further evidence in favor of pecking order models. It is also found that managers try to time the market by issuing shares when returns are high, but that there is a link between financing and investment activities as predicted by agency models.

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp114.

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Date of creation: May 2004
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Handle: RePEc:fam:rpseri:rp114
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