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

See all articles by Evan Dudley

Evan Dudley

Queen's University - Smith School of Business

Date Written: September 28, 2012

Abstract

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

Dudley, Evan, Capital Structure and Large Investment Projects (September 28, 2012). Dudley, E., (2012), Capital structure and large investment projects, Journal of Corporate Finance 18 (December 2012), 1168-1192. . Available at SSRN: https://ssrn.com/abstract=1030118 or http://dx.doi.org/10.2139/ssrn.1030118

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

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