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Capital Structure Choices

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  • Fama, Eugene F.
  • French, Kenneth R.

Abstract

We examine three pairs of cross-section regressions that test predictions of the tradeoff model, the pecking order model, and models that center on market conditions. The regressions examine (i) the split of new outside financing between share issues and debt, (ii) the split of new debt financing between short-term and long-term, and (iii) the split of new equity financing between share issues and retained earnings. The pecking order does well until the early 1980s, when the share issues that are its bane become common. The adjustment of leverage to target predicted by the tradeoff model and the response of equity financing to market valuations predicted by the market conditions model have statistically detectable but rather second-order effects on the split of new outside financing between share issues and debt. Targets for shortterm debt seem to influence the mix of short-term versus long-term debt choices of smaller firms, but this targeting effect is weak to non-existent for large firms. Sticky dividends plague the predictions of the pecking order and market conditions models about the split of equity financing between share issues and retained earnings.

Suggested Citation

  • Fama, Eugene F. & French, Kenneth R., 2012. "Capital Structure Choices," Critical Finance Review, now publishers, vol. 1(1), pages 59-101, January.
    • Handle: RePEc:now:jnlcfr:104.00000002
    DOI: 10.1561/104.00000002
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    Cited by:

    1. Meskat Ibne Sharif, 2019. "Fundamental Drivers of Capital Structure: Evidence from Publicly Traded Non-financial U.S. Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 9(6), pages 113-122.
    2. Michael J. Brennan & Holger Kraft, 2018. "Leaning Against the Wind: Debt Financing in the Face of Adversity," Financial Management, Financial Management Association International, vol. 47(3), pages 485-518, September.
    3. Campbell, Gareth & Rogers, Meeghan, 2018. "Capital structure volatility in Europe," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 128-139.
    4. Brennan, Michael J. & Kraft, Holger, 2016. "Leaning against the wind: Debt financing in the face of adversity," SAFE Working Paper Series 119, Leibniz Institute for Financial Research SAFE, revised 2016.
    5. Fitim Mexhuani & Artur Ribaj, 2018. "Some Factors for Growing Savings in Kosovo," European Journal of Marketing and Economics Articles, Revistia Research and Publishing, vol. 1, September.
    6. Edlira Luçi & Llesh Lleshaj, 2016. "Assessment of the Capital Structure and Cost of Capital Using Financial Indicators, the Case of Large Businesses in Albania," European Journal of Multidisciplinary Studies Articles, Revistia Research and Publishing, vol. 1, January -.
    7. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. Helena Chuliá & Ignacio Garrón & Jorge M. Uribe, 2021. ""Vulnerable Funding in the Global Economy"," IREA Working Papers 202106, University of Barcelona, Research Institute of Applied Economics, revised Mar 2021.
    9. DeAngelo, Harry, 2021. "Corporate financial policy: What really matters?," Journal of Corporate Finance, Elsevier, vol. 68(C).
    10. Restrepo, Natalia & Uribe, Jorge M. & Manotas, Diego F., 2020. "Dynamic capital structure under changing market conditions in the oil industry: An empirical investigation," Resources Policy, Elsevier, vol. 69(C).
    11. Patrice Fontaine & Sujiao Zhao, 2021. "Suppliers as financial intermediaries: Trade credit for undervalued firms," Post-Print hal-03507994, HAL.
    12. Ajaya Kumar Panda & Swagatika Nanda & Apoorva Arunachal Hegde & Akhilesh Kumar Kamalakant Yadav, 2023. "Receptivity of capital structure with financial flexibility: A study on manufacturing firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1981-1993, April.
    13. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    14. Alberternst, Stephan & Schwar, Torben, 2015. "Relevanz der Zinsschranke: Eine empirische Untersuchung der betroffenen Unternehmen von 2008 bis 2012," arqus Discussion Papers in Quantitative Tax Research 200, arqus - Arbeitskreis Quantitative Steuerlehre.
    15. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Paseda, Oluseun & Olowe, Rufus, 2018. "The Debt Maturity Structure of Nigerian Quoted Firms," MPRA Paper 117061, University Library of Munich, Germany, revised 30 Jun 2018.
    17. Llobet-Dalmases, Joan & Plana-Erta, Dolors & Uribe, Jorge M., 2023. "Cyclical capital structure decisions," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).

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