Determinants of Target Capital Structure: The Case of Dual Debt and Equity Issues

Abstract

We examine whether market and operating performance affect corporate financing behavior because they are related to target leverage. Our focus on firms that issue both debt and equity enhances our ability to draw inferences. Consistent with dynamic tradeoff theories, dual issuers offset the deviation from the target resulting from accumulation of earnings and losses. Our results also imply that high market-to-book firms have low target debt ratios. On the other hand, consistent with market timing, high stock returns increase the probability of equity issuance, but have no effect on target leverage.

Note: Previously Titled "Determinants of Target Capital Structure: The Case of Combined Debt and Equity Financing"

Keywords: Target leverage, target capital structure, debt issues, equity issues

JEL Classification: G30, G32