The Effect of Market Conditions on Capital Structure Adjustment

13 Pages Posted: 9 Dec 2003

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: November 10, 2003

Abstract

The empirical implications of the trade-off theory, the market timing theory, and Welch's (2003) theory of capital structure are examined using aggregate US data for 1952 to 2000. There is a long-run leverage ratio to which the system reverts. Deviations from that ratio help to predict debt adjustments, but not equity adjustments. A high market-to-book ratio is associated with subsequent debt reduction, but there is no effect in the equity market.

Keywords: Capital Structure, Market timing, trade-off, leverage adjustment

JEL Classification: G32

Suggested Citation

Frank, Murray Z. and Goyal, Vidhan K., The Effect of Market Conditions on Capital Structure Adjustment (November 10, 2003). Available at SSRN: https://ssrn.com/abstract=467081 or http://dx.doi.org/10.2139/ssrn.467081

Murray Z. Frank

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

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