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Leaning Against the Wind: Debt Financing in the Face of Adversity

SAFE Working Paper No. 119

36 Pages Posted: 30 Nov 2015 Last revised: 29 Dec 2016

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Holger Kraft

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: December 29, 2016

Abstract

We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of the first two hypotheses, and provisionally accept the 'making the numbers' hypothesis that managers who are under pressure because of unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities, will rely more heavily on debt financing to boost earnings per share and return on equity.

Keywords: Capital structure, financing policy, managerial incentives

JEL Classification: G12, G14, G32

Suggested Citation

Brennan, Michael J. and Kraft, Holger, Leaning Against the Wind: Debt Financing in the Face of Adversity (December 29, 2016). SAFE Working Paper No. 119. Available at SSRN: https://ssrn.com/abstract=2696886 or http://dx.doi.org/10.2139/ssrn.2696886

Michael John Brennan

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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