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Testing the Pecking Order Theory of Capital Structure

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TLDR
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.

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Journal ArticleDOI

Capital Structure Decisions: Which Factors Are Reliably Important?

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 (+).
Journal ArticleDOI

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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Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom

TL;DR: In this article, the authors estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms.
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CEO Overconfidence and Corporate Investment

TL;DR: In this paper, the authors argue that managerial overconfidence can account for corporate investment distortions and find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.
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Do Firms Rebalance Their Capital Structures

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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Journal ArticleDOI

Risk, Return, and Equilibrium: Empirical Tests

TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Journal ArticleDOI

Corporate financing and investment decisions when firms have information that investors do not have

TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
Journal ArticleDOI

Determinants of corporate borrowing

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.
Posted Content

What Do We Know About Capital Structure? Some Evidence from International Data

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.
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