Capital Structure and Large Investment Projects
Dudley, E., (2012), Capital structure and large investment projects, Journal of Corporate Finance 18 (December 2012), 1168-1192.
64 Pages Posted: 15 Nov 2007 Last revised: 13 May 2013
Date Written: September 28, 2012
This paper provides empirical evidence that lumpy investment projects provide firms with the opportunity to adjust leverage at low marginal cost. Consistent with a theoretical model, I find that 1) firms sequence equity before debt during the financing period of their investment projects, and 2) that firms adjust their leverage ratios toward their target leverage during these investment periods. I also show that proactive increases in leverage observed in other studies can be explained by the evolution of firms' target leverage ratios over the financing period of a project. My results are consistent with trade-off theory and imply that firms move toward their target capital structures when they invest.
Keywords: Capital structure, lumpy investment, leverage, adjustment costs, financing deficit, market timing
JEL Classification: G31, G32
Suggested Citation: Suggested Citation