Working Paper: NBER ID: w8782
Authors: Ivo Welch
Abstract: This paper shows that managers fail to readjust their capital structure in response to external stock returns. Thus, the typical firm's capital structure is not caused by attempts to time the market, by attempts to minimize taxes or bankruptcy costs, or by any other attempts at firm-value maximization. Instead, capital structure is almost entirely determined by lagged stock returns (which, when applied to ancient equity values, predict current equity value and with it debt equity ratios). Consequently, one should conclude that capital structure is determined primarily by external stock market influences, and not by internal corporate optimizing decisions.
Keywords: No keywords provided
JEL Codes: G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lagged stock returns (G17) | capital structure (G32) |
| capital structure (G32) | debt-equity ratios (G32) |
| lagged stock returns (G17) | debt-equity ratios (G32) |
| inertia (D52) | capital structure decisions (G32) |
| positive shocks to enterprise value (G32) | debt-equity ratios (G32) |