Capital Structure and Stock Returns

Abstract:     
U.S. corporations do not use their debt and equity issuing and repurchasing activities to counteract the mechanistic effects of stock returns on their debt equity ratios. Thus, over 1-5 year horizons, stock returns can explain about 40% of debt ratio dynamics. Although corporate (net) issuing activity is lively, and although it can explain the remaining 60% of debt ratio dynamics (long-term debt issuing activity being most capital structure relevant), corporate issuing motives remain largely a mystery. When stock returns are accounted for, taxes, bankruptcy costs, and many other proxies used in the literature, play at best a very modest role in explaining capital structure.

JEL Classifications: G24

Working Paper Series