Working Paper: NBER ID: w10526
Authors: Ayla Kayhan; Sheridan Titman
Abstract: This paper examines how cash flows, investment expenditures and stock price histories affect corporate 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 their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past profitability (L25) | Debt ratios (G32) |
| Financial deficits (H62) | Debt ratios (G32) |
| Stock price increases (G19) | Equity issuance (G24) |
| Market conditions (D49) | Leverage ratios (G32) |
| Debt ratios (G32) | Target debt ratios (G32) |