Financing Major Investments: Information About Capital Structure Decisions

Review of Finance, Forthcoming

59 Pages Posted: 12 Sep 2011 Last revised: 15 Jul 2013

See all articles by Ralf Elsas

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Date Written: April 29, 2013

Abstract

We evaluate U.S. firms’ leverage determinants by studying how 1,801 firms paid for 2,073 very large investments during the period 1989-2006. This approach complements existing empirical work on capital structure, which typically estimates regression models for a broad set of CRSP/Compustat firms. If firms making large investments generally raise new external funds, their securities issuances should provide information about managers’ attitudes toward leverage. Our data indicate that large investments are mostly externally financed and that firms issue securities that move them quite substantially toward target debt ratios. Firms also tend to issue more equity following a share price runup or when the market-to-book ratio is high. We find little support for the standard pecking order hypothesis.

Keywords: firm financing, firm investments, capital structure

JEL Classification: G14, G31, G32

Suggested Citation

Elsas, Ralf and Flannery, Mark Jeffrey and Garfinkel, Jon A., Financing Major Investments: Information About Capital Structure Decisions (April 29, 2013). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1926248 or http://dx.doi.org/10.2139/ssrn.1926248

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Jon A. Garfinkel (Contact Author)

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

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