Capital Structure Choices
Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)
June 24, 2011
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 debt financing between short-term and long-term, and (iii) the split of 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 short-term 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 the market conditions models about the split of equity financing between share issues and retained earnings.
Number of Pages in PDF File: 42
Keywords: Opportunistic Financing
JEL Classification: G32
Date posted: April 15, 2008 ; Last revised: September 22, 2011
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