Capital Structure and Stock Returns
University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)
June 16, 2003
Yale ICF Working Paper No. 02-03; EFMA 2002 London Meetings
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.
Number of Pages in PDF File: 35
JEL Classification: G24
Date posted: January 25, 2002
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