Firms' Histories and Their Capital Structures

53 Pages Posted: 14 Dec 2005

See all articles by Ayla Kayhan

Ayla Kayhan

Commodity Futures Trading Commission (CFTC); Louisiana State University

Sheridan Titman

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

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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

Kayhan, Ayla and Titman, Sheridan, Firms' Histories and Their Capital Structures. Journal of Financial Economics, Forthcoming. Available at SSRN:

Ayla Kayhan (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Louisiana State University ( email )

E. J. Ourso School of Business
Department of Finance
Baton Rouge, LA 70803
United States


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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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