A New Test of Capital Structure

47 Pages Posted: 5 Jan 2005

See all articles by Colin Mayer

Colin Mayer

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Oren Sussman

European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 6, 2004

Abstract

We report results of a new test of the financing of large and indivisible projects - arguably the focus of most capital structure theory. We develop a filter that identifies investment spikes in a large population of firms. Consistent with the pecking-order theory we find that projects are predominantly financed with debt, particularly in large and profitable firms. However, we reject the hypothesis that internal finance plays a major role in funding investment. Consistent with the trade-off theory, firms show a strong tendency to revert back to their initial leverage. This pattern of "pecking order in the short run, trade-off in the long run" is consistent with equity adjustment being postponed until certain thresholds are reached. However, we do not find evidence that equity issues are lumpy or infrequent.

Keywords: Capital structure, pecking order theory, trade-off theory

JEL Classification: G32

Suggested Citation

Mayer, Colin and Sussman, Oren, A New Test of Capital Structure (October 6, 2004). Available at SSRN: https://ssrn.com/abstract=643388 or http://dx.doi.org/10.2139/ssrn.643388

Colin Mayer (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Oren Sussman

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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