The Effect of Market Conditions on Capital Structure Adjustment
13 Pages Posted: 9 Dec 2003
Date Written: November 10, 2003
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: Suggested Citation