How do Firms make Capital Structure Decisions? Evidence from Acquisitions, Buybacks and Equity Issues

Abstract:     
This paper tests whether major changes in capital structure as a result of acquisitions, share repurchases and equity issues are consistent with the prediction of empirical trade-off models of capital structure. The answer is affirmative for acquisitions and buybacks, but not for equity issues. The paper also asks whether deviations from predictions of the trade-off theory are driven by market timing. Here the answer is “yes” for all capital structure decisions, with one qualification: issuing overvalued stock in acquisitions is only possible if the financing choice can also be motivated by the trade-off theory.

Keywords: Mergers and acquisitions, capital structure, market timing, mispricing

JEL Classifications: G14, G34

Working Paper Series