Abstract

http://ssrn.com/abstract=1023581
 
 

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To Have a Target Debt Ratio or Not: What Difference Does it Make?


Abe De Jong


Erasmus University - Rotterdam School of Management

Patrick Verwijmeren


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

October 28, 2009

Applied Financial Economics, Forthcoming

Abstract:     
The static tradeoff theory of capital structure predicts that firms aim to approach a target debt ratio. The theory provides several firm characteristics that determine this target ratio. In contrast, the pecking order model rejects a target debt ratio, because firms are expected to finance investments subsequently from (internal) equity, debt, and (external) equity. A fundamental problem in empirical studies is that having a target debt ratio or not is unobservable from public data. We use survey evidence from 235 CFOs to discriminate static tradeoff firms from pecking order firms and relate the responses to public data. For the two sets of firms we estimate standard capital structure models and find that pecking order firms contaminate static tradeoff theory-based estimations.

Number of Pages in PDF File: 20

Keywords: pecking order theory, static tradeoff theory

JEL Classification: C42, G32

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Date posted: October 22, 2007 ; Last revised: October 29, 2009

Suggested Citation

de Jong, Abe and Verwijmeren, Patrick, To Have a Target Debt Ratio or Not: What Difference Does it Make? (October 28, 2009). Applied Financial Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1023581

Contact Information

Abe De Jong
Erasmus University - Rotterdam School of Management ( email )
P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 1022 (Phone)
HOME PAGE: http://web.eur.nl/fbk/dep/dep5/faculty/ajong
Patrick Verwijmeren (Contact Author)
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
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