Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-03T08:14:31.776Z Has data issue: false hasContentIssue false
  • English
  • Français

Debt Capacity and Tests of Capital Structure Theories

Published online by Cambridge University Press:  17 August 2010

Michael L. Lemmon  and
Jaime F. Zender
Michael L. Lemmon
Affiliation:
Eccles School of Business, University of Utah, 1645 E. Campus Center Dr., Rm. 109, Salt Lake City, UT 84112. [email protected].
Jaime F. Zender
Affiliation:
Leeds School of Business, University of Colorado at Boulder, UCB 419, Boulder, CO 80309. [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the impact of explicitly incorporating a measure of debt capacity in recent tests of competing theories of capital structure. Our main results are that if external funds are required, in the absence of debt capacity concerns, debt appears to be preferred to equity. Concerns over debt capacity largely explain the use of new external equity financing by publicly traded firms. Finally, we present evidence that reconciles the frequent equity issues by small, high-growth firms with the pecking order. After accounting for debt capacity, the pecking order theory appears to give a good description of financing behavior for a large sample of firms examined over an extended time period.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 5 , October 2010 , pp. 1161 - 1187
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Almeida, H., and Campello, M.. “Financing Frictions and the Substitution Effect between Internal and External Funds.” Journal of Financial and Quantitative Analysis, 45 (2010), 589–622.CrossRefGoogle Scholar
Almeida, H.; Campello, M.; and Weisbach, M. S.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 1777–1804.CrossRefGoogle Scholar
Altinkiliç, O., and Hansen, R. S.. “Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs.” Review of Financial Studies, 13 (2000), 191–218.CrossRefGoogle Scholar
Bolton, P., and Freixas, X.. “Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information.” Journal of Political Economy, 108 (2000), 324–351.CrossRefGoogle Scholar
Brennan, M., and Kraus, A.. “Efficient Financing under Asymmetric Information.” Journal of Finance, 42 (1987), 1225–1243.CrossRefGoogle Scholar
Cantillo, M., and Wright, J.. “How Do Firms Choose Their Lenders? An Empirical Examination.” Review of Financial Studies, 13 (2000), 155–189.CrossRefGoogle Scholar
Carpenter, R. E.; Fazzari, S. M.; and Peterson, B. C.. “Financing Constraints and Inventory Investment: A Comparative Study with High-Frequency Panel Data.” Review of Economics and Statistics, 80 (1998), 513–519.CrossRefGoogle Scholar
Chang, X., and Dasgupta, S.. “Target Behavior and Financing: How Conclusive Is the Evidence?” Journal of Finance, 64 (2009), 1767–1796.CrossRefGoogle Scholar
Chirinko, R. S., and Singha, A. R.. “Testing Static Tradeoff against Pecking Order Models of Capital Structure: A Critical Comment.” Journal of Financial Economics, 58 (2000), 412–425.CrossRefGoogle Scholar
Dybvig, P. H., and Zender, J. F.. “Capital Structure and Dividend Irrelevance with Asymmetric Information.” Review of Financial Studies, 4 (1991), 201–219.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Testing Trade-Off and Pecking Order Predictions about Dividends and Debt.” Review of Financial Studies, 15 (2002), 1–33.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Financing Decisions: Who Issues Stock?” Journal of Financial Economics, 76 (2005), 549–582.CrossRefGoogle Scholar
Faulkender, M., and Petersen, M. A.. “Does the Source of Capital Affect Capital Structure?” Review of Financial Studies, 19 (2006), 45–79.CrossRefGoogle Scholar
Fischer, E. O.; Heinkel, R.; and Zechner, J.. “Dynamic Capital Structure Choice: Theory and Tests.” Journal of Finance, 44 (1989), 19–40.CrossRefGoogle Scholar
Frank, M. Z., and Goyal, V. K.. “Testing the Pecking Order Theory of Capital Structure.” Journal of Financial Economics, 67 (2003), 217–248.CrossRefGoogle Scholar
Hellmann, T., and Stiglitz, J.. “Credit and Equity Rationing in Markets with Adverse Selection.” European Economic Review, 44 (2000), 281–304.CrossRefGoogle Scholar
Holmstrom, B., and Tirole, J.. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics, 112 (1997), 663–691.CrossRefGoogle Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Korajczyk, R. A., and Levy, A.. “Capital Structure Choice: Macroeconomic Conditions and Financial Constraints.” Journal of Financial Economics, 68 (2003), 75–109.CrossRefGoogle Scholar
Korajczyk, R. A.; Lucas, D. J.; and McDonald, R. L.. “The Effect of Information Releases on the Pricing and Timing of Equity Issues.” Review of Financial Studies, 4 (1991), 685–708.CrossRefGoogle Scholar
Leary, M. T., and Roberts, M. R.. “The Pecking Order, Debt Capacity, and Information Asymmetry.” Journal of Financial Economics, 95 (2010), 332–355.CrossRefGoogle Scholar
Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporate Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Myers, S. C. “The Capital Structure Puzzle.” Journal of Finance, 39 (1984), 575–592.CrossRefGoogle Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Shyam-Sunder, L., and Myers, S. C.. “Testing Static Tradeoff against Pecking Order Models of Capital Structure.” Journal of Financial Economics, 51 (1999), 219–244.CrossRefGoogle Scholar
Stein, J. C. “Convertible Bonds as Backdoor Equity Financing.” Journal of Financial Economics, 32 (1992), 3–21.CrossRefGoogle Scholar
Stiglitz, J. E., and Weiss, A.. “Credit Rationing in Markets and Imperfect Information.” American Economic Review, 71 (1981), 393–410.Google Scholar
Whited, T. M. “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data.” Journal of Finance, 47 (1992), 1425–1460.CrossRefGoogle Scholar