A New Test of Capital Structure
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London
CEPR Discussion Paper No. 4239
This Paper reports a new test of capital structure theories. It uses a filtering technique to identify large investment spikes. We find that the spikes are predominantly financed with debt by large firms and by new equity by small loss-making firms. In the process, firms move significantly away from their previous capital structures but then revert back to them by making frequent issues of small amounts of equity. Neither the pecking order nor the trade-off theories on their own provide satisfactory descriptions of these dynamic features of corporate financing.
Number of Pages in PDF File: 45
Keywords: Capital structure, corporate finance, pecking order, trade-off theory
JEL Classification: G32working papers series
Date posted: February 25, 2004
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