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Further Evidence on Debt-Equity Choice

Author

Listed:
  • Philippe GAUD

    (HEC - University of Geneva)

  • Martin HOESLI

    (HEC - University of Geneva, FAME and University of Aberdeen (School of Business))

  • André BENDER

    (HEC - University of Geneva & FAME)

Abstract

Using a large sample of 5,365 European firms,we document the driving factors of debt-equity choices. Adjustments to a target debt level play a modest role except when debt exceeds an upper barrier, a result that underlines the importance of debt capacity. Preference for internal financing, leverage deficit prior to equity issues, as well as a high level of slack of firms seeking to reduce equity constitute further evidence in favor of pecking order models. It is also found that managers try to time the market by issuing shares when returns are high, but that there is a link between financing and investment activities as predicted by agency models.

Suggested Citation

  • Philippe GAUD & Martin HOESLI & André BENDER, 2004. "Further Evidence on Debt-Equity Choice," FAME Research Paper Series rp114, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp114
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    File URL: http://www.swissfinanceinstitute.ch/rp114.pdf
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    References listed on IDEAS

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    2. Sarkar, Sudipto & Zhang, Chuanqian, 2015. "Investment policy with time-to-build," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 142-156.

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    More about this item

    Keywords

    Dynamic capital structure; Debt-equity choice; Tradeoff models; Pecking order models;
    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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