The Debt-Equity Choice
Tim C. Opler
Credit Suisse First Boston
Sheridan Titman
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
Dice Center for Research in Financial Economics
Abstract:
This paper compares U.S. firms that issued or repurchased significant amounts of equity between 1978 and 1993 to those that issued or repurchased debt. We find that firms are most likely to increase debt and repurchase equity when they have less debt than is predicted by a cross-sectional leverage regression. In addition, the likelihood of issuing debt rises with the firms' past profitability. Our results confirm previous findings that firms are most likely to issue equity after experiencing a share price increase. In contrast to our other findings, this last result appears to be inconsistent with the hypothesis that firms make choices that move them towards a target debt ratio. The paper concludes by exploring a variety of explanations for the positive relation between share price runups and equity issuance.
JEL Classification: G31, G32
working papers series
Suggested Citation
Opler, Tim C. and Titman, Sheridan, The Debt-Equity Choice. Dice Center for Research in Financial Economics. Available at SSRN: http://ssrn.com/abstract=79476
