A New Test of Capital Structure
Moores Professor of Management Studies, Saïd Business School, University
Business School, University of Oxford
paper reports a new test of capital structure theories.
It uses a filtering technique to identify large investment spikes.
We find that the spikes are predominantly financed with debt by
large firms and with new equity by small firms.
In the process of financing large projects, firms move
significantly away from their previous capital structure, as predicted by
the pecking order theory. Furthermore,
consistent with the pecking order theory, new equity issues are primarily
associated with small, loss-making firms.
However, we also observe a tendency for firms to adjust back to
previous levels of leverage, consistent with a trade-off theory.
We conclude that a combination of the pecking order and trade-off
theories provides a good description of short-run and longer run dynamics.
words: Capital structure, corporate finance, pecking order theory,
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