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Firms' Histories and Their Capital Structures

  • Ayla Kayhan
  • Sheridan Titman

This paper examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10526.

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Date of creation: May 2004
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Publication status: published as Kayhan, Ayla & Titman, Sheridan, 2007. "Firms' histories and their capital structures," Journal of Financial Economics, Elsevier, vol. 83(1), pages 1-32, January.
Handle: RePEc:nbr:nberwo:10526
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