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A New Test of Capital Structure

Author

Listed:
  • Colin Mayer
  • Oren Sussman

Abstract

This 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.

Suggested Citation

  • Colin Mayer & Oren Sussman, 2003. "A New Test of Capital Structure," Economics Series Working Papers 2003-FE-16, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2003-fe-16
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    File URL: https://ora.ox.ac.uk/objects/uuid:f45bdc11-a0e1-4d92-bf16-19d66290961d
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    More about this item

    Keywords

    capital structure; corporate finance; pecking order theory; trade-off theory;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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