Corporate Funding: Who Finances Externally?
B. Espen Eckbo
Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI)
Norwegian School of Economics (NHH)
March 28, 2013
Tuck School of Business Working Paper No. 2012-110
We document a surprising reliance on internal finance among eleven thousand U.S. public industrial companies over the past quarter-century. Pooling all sources of cash, the median contribution from net debt issues (above debt repurchases) is zero for the period, and two percent for equity issues. Fifty-six percent of the firms issue positive net debt at most twice over the quarter-century. As predicted, low-frequency issuers exhibit significantly higher fixed direct issue costs than low-frequency issuers. After the IPO year, debt issues are overwhelmingly rollovers, supporting a relatively stable average leverage ratio. In an average year, firms raise twelve percent of total funds externally, but the top two hundred issuers receive eighty-four percent of the total net debt issue proceeds. We also discover that funding decisions differ significantly in response to positive and negative net operating cash flows. Negative operating cash flow triggering primarily equity issues. However, in years with positive operating cash flow, the correlation between debt issues and profitability is positive, which helps resolve a long-standing capital structure puzzle.
Number of Pages in PDF File: 66
Keywords: Capital structure, external finance, debt issues, equity issues, issue costs, leverage, cash-flow identity
JEL Classification: G32working papers series
Date posted: March 17, 2013 ; Last revised: March 29, 2013
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