Working Paper: CEPR ID: DP4239
Authors: Colin Mayer; Oren Sussman
Abstract: This 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 by new equity by small loss-making firms. In the process, firms move significantly away from their previous capital structures but then revert back to them by making frequent issues of small amounts of equity. Neither the pecking order nor the trade-off theories on their own provide satisfactory descriptions of these dynamic features of corporate financing.
Keywords: capital structure; corporate finance; pecking order; tradeoff theory
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of the investment spike (E22) | amount of external financing utilized (G32) |
| current earnings (J31) | external funding (O36) |
| financial constraints (H60) | financing behavior of small lossmaking firms (G32) |
| investment spikes (G31) | adjustments in capital structure (G32) |
| financing behavior (G32) | firm characteristics (L20) |