Debt Capacity and Tests of Capital Structure Theories

✍ Scribed by Lemmon, Michael L.; Zender, Jaime F.

• Book ID: 111905010
• Publisher: School of Business Administration, University of Washington
• Year: 2010
• Tongue: English
• Weight: 154 KB
• Volume: 45
• Category: Article
• ISSN: 0022-1090
• DOI: 10.1017/s0022109010000499

✦ Synopsis

Abstract

We examine the impact of explicitly incorporating a measure of debt capacity in recent tests of competing theories of capital structure. Our main results are that if external funds are required, in the absence of debt capacity concerns, debt appears to be preferred to equity. Concerns over debt capacity largely explain the use of new external equity financing by publicly traded firms. Finally, we present evidence that reconciles the frequent equity issues by small, high-growth firms with the pecking order. After accounting for debt capacity, the pecking order theory appears to give a good description of financing behavior for a large sample of firms examined over an extended time period.