Capital Structure and Stock Returns

Posted: 25 Jan 2004

See all articles by Ivo Welch

Ivo Welch

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

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Abstract

U.S. corporations do not issue and repurchase debt and equity to counteract the mechanistic effects of stock returns on their debt-equity ratios. Thus over one- to five-year horizons, stock returns can explain about 40 percent of debt ratio dynamics. Although corporate net issuing activity is lively and although it can explain 60 percent 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, many other proxies used in the literature play a much lesser role in explaining capital structure.

JEL Classification: G32

Suggested Citation

Welch, Ivo, Capital Structure and Stock Returns. Journal of Political Economy, Vol. 112, No. 1, Pt. 1, pp. 106-31, February 2004. Available at SSRN: https://ssrn.com/abstract=489664

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