How Important is Capital Structure Policy to Firm Survival?

48 Pages Posted: 2 Nov 2011 Last revised: 1 Apr 2013

See all articles by Y. Peter Chung

Y. Peter Chung

University of California at Riverside

Hyun Seung Na

Korea University Business School (KUBS)

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Date Written: February 20, 2013

Abstract

If there is an economically important optimal capital structure, then firms that deviate too far from the optimum will face greater risk of failure or acquisition. Using data from the oil industry we find no significant evidence that capital structure policy affects acquisition or failure probability. Firms appear to increase leverage when they face attractive growth opportunities or when poor operating performance reduces equity value or compels borrowing. Firms are acquired when rapid growth has reduced financial slack. In a clinical examination, we address the question of how firms with persistently low leverage can operate and survive for many years without being targeted for acquisition. Our evidence supports the pecking-order hypothesis including acquisition among potential financing sources.

Keywords: Capital structure, Bankruptcy, Acquisition, Oil exploration and development

JEL Classification: G32, G33, G34, L25, L71

Suggested Citation

Chung, Y. Peter and Na, Hyun Seung and Smith, Richard L., How Important is Capital Structure Policy to Firm Survival? (February 20, 2013). Available at SSRN: https://ssrn.com/abstract=1952199 or http://dx.doi.org/10.2139/ssrn.1952199

Y. Peter Chung

University of California at Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States
909-787-3906 (Phone)
909-787-2933 (Fax)

Hyun Seung Na

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Richard L. Smith (Contact Author)

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

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