Firms' Histories and Their Capital Structures
51 Pages Posted: 1 Jun 2004
Date Written: May 2004
This paper examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.
Keywords: Capital structure, tradeoff, market timing, pecking order, stock returns, target debt ratio
JEL Classification: G32
Suggested Citation: Suggested Citation