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A New Test of Capital Structure

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Listed:
  • Mayer, Colin
  • Sussman, Oren

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 by new equity by small loss-making firms. In the process, firms move significantly away from their previous capital structures but then revert back to them by making frequent issues of small amounts of equity. Neither the pecking order nor the trade-off theories on their own provide satisfactory descriptions of these dynamic features of corporate financing.

Suggested Citation

  • Mayer, Colin & Sussman, Oren, 2004. "A New Test of Capital Structure," CEPR Discussion Papers 4239, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4239
    as

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    References listed on IDEAS

    as
    1. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. "On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-878, July.
    5. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    6. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
    7. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    8. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
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    11. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    12. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    13. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    14. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    15. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    16. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc.
    17. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    18. Corbett, Jenny & Jenkinson, Tim, 1997. "How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 69-93, Supplemen.
    19. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
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    Cited by:

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    2. Saumitra, Bhaduri, 2012. "Why do firms issue equity? Some evidence from an emerging economy, India," MPRA Paper 38043, University Library of Munich, Germany.
    3. Ralph de Haas & Sergei Guriev & Alexander Stepanov, 2022. "State Ownership and Corporate Leverage Around the World," SciencePo Working papers Main hal-03878686, HAL.
    4. Yi Huang & Ugo Panizza & Richard Portes, 2018. "Corporate Foreign Bond Issuance and Interfirm Loans in China," NBER Working Papers 24513, National Bureau of Economic Research, Inc.
    5. Yunus Aksoy & Henrique S. Basso & Javier Coto-Martinez, 2013. "Lending Relationships And Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 368-393, January.
    6. Langberg, Nisan, 2008. "Optimal financing for growth firms," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 379-406, July.
    7. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    8. Bargeron, Leonce & Denis, David & Lehn, Kenneth, 2018. "Financing investment spikes in the years surrounding World War I⁎," Journal of Financial Economics, Elsevier, vol. 130(2), pages 215-236.
    9. Guriev, Sergei & Kvasov, Dmitriy, 2009. "Imperfect competition in financial markets and capital structure," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 131-146, October.
    10. Massa, Massimo & Peyer, Urs & Tong, Zhenxu, 2005. "Limits of Arbitrage and Corporate Financial Policy," CEPR Discussion Papers 4829, C.E.P.R. Discussion Papers.
    11. Sapienza, Paola & Polk, Christopher, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
    12. Ralph de Haas & Marga Peeters, 2006. "The dynamic adjustment towards target capital structures of firms in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 133-169, March.
    13. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, vol. 99(2), pages 235-261, February.
    14. Tsyplakov, Sergey, 2008. "Investment frictions and leverage dynamics," Journal of Financial Economics, Elsevier, vol. 89(3), pages 423-443, September.

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    More about this item

    Keywords

    Capital structure; Corporate finance; Pecking order; 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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