THE CAPITAL STRUCTURE CHOICE: NEW EVIDENCE FOR A DYNAMIC TRADEOFF MODEL
Most academic insights about corporate capital structure decisions come from models that focus on the trade-off between the tax benefits and financial distress costs of debt financing. But empirical tests of corporate capital structure indicate that actual debt ratios are considerably different from those predicted by the models, casting doubt on whether most companies have leverage targets at all. In particular, there is considerable evidence that corporate leverage ratios reflect in large part the tendency of profitable companies to use their excess cash flow to pay down debt, while unprofitable companies build up higher leverage ratios. Such behavior is consistent with a competing theory of capital structure known as the "pecking order" model, in which management's main objectives are to preserve financing flexibility and avoid issuing equity. 2002 Morgan Stanley.
Year of publication: |
2002
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Authors: | Hovakimian, Armen ; Opler, Tim ; Titman, Sheridan |
Published in: |
Journal of Applied Corporate Finance. - Morgan Stanley, ISSN 1078-1196. - Vol. 15.2002, 1, p. 24-30
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Publisher: |
Morgan Stanley |
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