Columbus' Egg: The Real Determinant of Capital Structure

44 Pages Posted: 14 Feb 2002 Last revised: 26 Oct 2010

See all articles by Ivo Welch

Ivo Welch

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

Date Written: February 2002

Abstract

This paper shows that managers fail to readjust their capital structure in response to external stock returns. Thus, the typical firm's capital structure is not caused by attempts to time the market, by attempts to minimize taxes or bankruptcy costs, or by any other attempts at firm-value maximization. Instead, capital structure is almost entirely determined by lagged stock returns (which, when applied to ancient equity values, predict current equity value and with it debt equity ratios). Consequently, one should conclude that capital structure is determined primarily by external stock market influences, and not by internal corporate optimizing decisions.

Suggested Citation

Welch, Ivo, Columbus' Egg: The Real Determinant of Capital Structure (February 2002). NBER Working Paper No. w8782. Available at SSRN: https://ssrn.com/abstract=300744

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