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Capital Structure and Stock Returns

35 Pages Posted: 25 Jan 2002  

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 16, 2003

Abstract

U.S. corporations do not use their debt and equity issuing and repurchasing activities to counteract the mechanistic effects of stock returns on their debt equity ratios. Thus, over 1-5 year horizons, stock returns can explain about 40% of debt ratio dynamics. Although corporate (net) issuing activity is lively, and although it can explain the remaining 60% of debt ratio dynamics (long-term debt issuing activity being most capital structure relevant), corporate issuing motives remain largely a mystery. When stock returns are accounted for, taxes, bankruptcy costs, and many other proxies used in the literature, play at best a very modest role in explaining capital structure.

JEL Classification: G24

Suggested Citation

Welch, Ivo, Capital Structure and Stock Returns (June 16, 2003). Yale ICF Working Paper No. 02-03; EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=298196 or http://dx.doi.org/10.2139/ssrn.298196

Ivo Welch (Contact Author)

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