Debt Capacity and Tests of Capital Structure Theories

44 Pages Posted: 17 Oct 2002

See all articles by Jaime F. Zender

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Michael L. Lemmon

University of Utah - Department of Finance

Date Written: September 10, 2002

Abstract

The impact of debt capacity on recent tests of competing theories of capital structure is examined. Controlling for debt capacity, the pecking order appears to be a good description of the financing policies of a large sample of firms. The main results are first, that internally generated funds appear to be the preferred source of financing. Second, if external funds are required, in the absence of debt capacity concerns, debt appears to be preferred to equity and, when possible, debt capacity is "stockpiled." Demonstration of this preference also provides evidence directly contradictory to the tradeoff theory. Finally, we present evidence consistent with the hypothesis that asymmetric information and its attendant costs are the basis for the observed pecking order of financing choice.

Suggested Citation

Zender, Jaime F. and Lemmon, Michael L., Debt Capacity and Tests of Capital Structure Theories (September 10, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=334780 or http://dx.doi.org/10.2139/ssrn.334780

Jaime F. Zender

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

Michael L. Lemmon (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

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