Financing Major Investments : Information About Capital Structure Decisions

We evaluate U.S. firms' leverage determinants by studying how 1,801 firms paid for 2,073 very large investments during the period 1989-2006. This approach complements existing empirical work on capital structure, which typically estimates regression models for a broad set of CRSP/Compustat firms. If firms making large investments generally raise new external funds, their securities issuances should provide information about managers' attitudes toward leverage. Our data indicate that large investments are mostly externally financed and that firms issue securities that move them quite substantially toward target debt ratios. Firms also tend to issue more equity following a share price runup or when the market-to-book ratio is high. We find little support for the standard pecking order hypothesis