This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.

/pdf/capital-structure-decisions-which-factors-are-reliably-55nwu4yjxo.pdf

Capital Structure Decisions: Which Factors Are Reliably Important?

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio, and that the target ratio may change over time as the firm's profitability and stock price change. A separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision.

The debt-equity choice

http://lib.cufe.edu.cn/upload_files/other/4_20140512105606_12.pdf

Partial adjustment toward target capital structures

The literature provides conflicting assessments about how firms choose their capital structures, with the "tradeoff", pecking order, and market timing hypotheses all receiving some empirical support. Distinguishing among these theories requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have relied on empirical specifications that fail to recognize the potential impact of adjustment costs on a firm's observed leverage. Likewise, few researchers have incorporated the effect of share price changes on market-valued leverage. We estimate a relatively general, partial-adjustment model of firm leverage decisions, and conclude that firms do have target capital structures. The typical firm closes more than half the gap between its actual and its target debt ratios within two years. 'Targeting' behavior as opposed to market timing or pecking order considerations explains a majority of the observed changes in capital structure.

Partial Adjustment Toward Target Capital Structures

Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run-up in the year prior to the offering. This article documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high-growth firms, but issuers have much lower subsequent stock returns than nonissuers with the same growth rate. SEVERAL RECENT EMPIRICAL STUDIES have documented the poor stock market performance of firms conducting seasoned equity offerings (SEOs) in the United States and other countries.1 Loughran and Ritter (1995) report that the average raw return for issuing firms is only 7 percent per year during the five years after the offering, compared to 15 percent per year for nonissuing firms of the same market capitalization. These low postissue returns follow extremely high returns in the year prior to the offering: 72 percent on average.2 This article links the stock price performance of these issuing firms to their operating performance, and in so doing, addresses four questions: 1) Does the postissue operating performance of issuers deteriorate relative to comparable nonissuing firms? 2) Are the patterns for large issuers different from those for small issuers? 3) Do the capital expenditure decisions of issuers suggest that the managers are just as overoptimistic as investors are? 4) Given that issuing firms tend to be rapidly growing, and rapidly growing firms display strong

https://www.jstor.org/stable/pdfplus/2329466.pdf

The operating performance of firms conducting seasoned equity offerings

Following several years of severe price volatility, market uncertainty and a number of well-publicized controversies, the issuance of high-yield bonds virtually ceased by 1990, suggesting that interest in these instruments might disappear as well. During 1991 and 1992, however, total annual returns on high-yield bonds approached 40%, and with it record new issuances. Analysts and investors alike have since revisited the unresolved questions regarding risk of high-yield bonds and their associated yield spreads.

Marketability and Default Influences on the Yield Premia of Speculative-Grade Debt

This paper analyzes a large sample of public security offerings to determine the motivation to issue debt or common equity. The results provide new evidence that the existence of asymmetric information plays a key role in firms' choice of security. Bankruptcy risk appears to affect the issue decision, but other traditional capital structure considerations do not. Variations in the determinants of security choice over time suggest a dynamic aspect to capital structure decisions not recognized in previous studies.

Securities offerings and capital structure theory

The hypothesis that negative abnormal returns following an equity issue are anomalous assumes the use of the correct benchmark. The alternative hypothesis assumes that an incorrect benchmark has been used or that benchmarks change following an issue. We evaluate these assumptions by examining the performance of SEO firms during periods when there was no issue activity. Results indicate that SEO firms experience positive abnormal returns away from the issue window and that positive performance is most pronounced for small SEO firms. These and other results are inconsistent with the alternative hypothesis.

Is the performance of firms following seasoned equity issues anomalous

We use compensation data for a sample of 701 US public firms and document a significant positive relation between the level of executive compensation and the subsequent realized stock returns. In present value terms, shareholders in firms incurring a total compensation cost of $78 million above the median experience subsequent incremental wealth gains of $385 million above the median over the 5-year period following compensation awards. The results are robust to the use of size and industry-adjusted measures of compensation and returns, and hold after we segment the sample by firm size and industry. Our evidence is consistent with rational executive labour markets where more talented executives command higher compensation and produce superior returns.

The myth of executive compensation: do shareholders get what they pay for?

Existing empirical evidence suggests that the announcement-day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement-day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re-examine the announcement-day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first-time seasoned equity issue is more than 4.15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues.

The influence of predictability on differences in the market reaction to debt and equity issue announcements

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