Testing the Pecking Order Theory of Capital Structure
Murray Z. Frank,Vidhan K. Goyal +1 more
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In this paper, the static trade-off theory of corporate leverage is tested against the pecking order theory of Corporate leverage, using a broad cross-section of US firms over the period 1980-1998, and robust evidence of mean reversion in leverage is found.Abstract:
The pecking order theory of corporate leverage is tested against the static tradeoff theory of corporate leverage, using a broad cross-section of US firms over the period 1980-1998. A derivation of the conditional target adjustment framework is provided as a better empirical test of mean reversion. None of the predictions of the pecking order theory hold in the data. As predicted by the static tradeoff theory, robust evidence of mean reversion in leverage is found. This is true both unconditionally and conditionally on financial factors. Leverage is more persistent at lower levels than at higher levels. When debt matures, it is not replaced dollar for dollar by new debt and so leverage declines. Large firms increase their debt in order to support the payment of dividends. By contrast, small firms reduce their debt while they pay dividends.read more
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Capital Structure Decisions: Which Factors Are Reliably Important?
Murray Z. Frank,Vidhan K. Goyal +1 more
TL;DR: This article examined the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003 and found that the most reliable factors for explaining market leverage are: median industry leverage, market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+).
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Partial Adjustment Toward Target Capital Structures
TL;DR: In this article, the authors consider the effect of share price changes on market-valued leverage and conclude that firms do have target capital structures, as opposed to market timing or pecking order considerations, which explains a majority of the observed changes in capital structure.
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TL;DR: The authors empirically examined whether firms engage in dynamic rebalancing of their capital structures, while allowing for costly adjustment, and found that firms respond to changes in their equity value, due to price shocks or equity issuances, by adjusting their leverage over the two to four years following the change.
References
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Eugene F. Fama,James D. MacBeth +1 more
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TL;DR: In this article, the authors predict that corporate borrowing is inversely related to the proportion of market value accounted for by real options and rationalize other aspects of corporate borrowing behavior, such as the practice of matching maturities of assets and debt liabilities.
Book
Econometric Analysis of Panel Data
TL;DR: In this article, the authors proposed a two-way error component regression model for estimating the likelihood of a particular item in a set of data points in a single-dimensional graph.
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What Do We Know About Capital Structure? Some Evidence from International Data
Raghuram G. Rajan,Raghuram G. Rajan,Raghuram G. Rajan,Luigi Zingales,Luigi Zingales,Luigi Zingales +5 more
TL;DR: In this paper, the authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries and find that factors identified by previous studies as important in determining the cross-section of the capital structure in the U.S. affect firm leverage in other countries as well.