How Important is Capital Structure Policy to Firm Survival?
Y. Peter Chung
University of California at Riverside
Hyun Seung Na
City University of Hong Kong
Richard L. Smith
University of California, Riverside - Anderson Graduate School of Management
February 20, 2013
If there is an economically important optimal capital structure, then firms that deviate too far from the optimum will face greater risk of failure or acquisition. Using data from the oil industry we find no significant evidence that capital structure policy affects acquisition or failure probability. Firms appear to increase leverage when they face attractive growth opportunities or when poor operating performance reduces equity value or compels borrowing. Firms are acquired when rapid growth has reduced financial slack. In a clinical examination, we address the question of how firms with persistently low leverage can operate and survive for many years without being targeted for acquisition. Our evidence supports the pecking-order hypothesis including acquisition among potential financing sources.
Number of Pages in PDF File: 48
Keywords: Capital structure, Bankruptcy, Acquisition, Oil exploration and development
JEL Classification: G32, G33, G34, L25, L71working papers series
Date posted: November 2, 2011 ; Last revised: April 1, 2013
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