The Debt-Equity Choice: An Analysis of Issuing Firms

Posted: 4 Oct 1999

See all articles by Tim C. Opler

Tim C. Opler

Credit Suisse First Boston

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: November 1994

Abstract

This paper compares the characteristics of U.S. firms which issued equity between 1976 and 1993 to those which increased their use of debt financing. We find that fims are most likely to issue debt when they have less debt than ispredicted by a cross-sectional model. In addition, firms that were very profitable prior to the issue were more likely to increase their use of debt financing and those that accumulated loses tended to issue equity. Our results also confirm previous findings that firms are most likely to issue equity after experiencing a rise in their share price. In contrast to our other findings, this last result appears to be inconsistent with the hypothesis that firms select their capital structures by trading off tax and other advantages of debt financing with financial distress and other costs associated with debt. Results on samples stratified by different proxies for asymmetric information fails to support asymmetric information based explanations for this phenomena.

JEL Classification: G32

Suggested Citation

Opler, Tim C. and Titman, Sheridan, The Debt-Equity Choice: An Analysis of Issuing Firms (November 1994). Available at SSRN: https://ssrn.com/abstract=5909

Tim C. Opler (Contact Author)

Credit Suisse First Boston ( email )

11 Madison Avenue
Investment Banking Div., 23rd Flr
New York, NY 10010
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(212) 328-5313 (Phone)
(212) 448-3410 (Fax)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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