Firms' Histories and Their Capital Structures
53 Pages Posted: 14 Dec 2005
This paper examines how cash flows, investment expenditures and stock price histories affect 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 over long horizons their effects are partially reversed. These results indicate that although firms' histories strongly influence their capital structures, over time their capital structures tend to move 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