Target Behavior and Financing: How Conclusive Is the Evidence?

✍ Scribed by XIN CHANG; SUDIPTO DASGUPTA

• Book ID: 109176604
• Publisher: John Wiley and Sons
• Year: 2009
• Tongue: English
• Weight: 216 KB
• Volume: 64
• Category: Article
• ISSN: 0022-1082
• DOI: 10.1111/j.1540-6261.2009.01479.x

✦ Synopsis

ABSTRACT

The notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance. Yet, how definitive is the evidence? We address this issue by generating samples where financing is unrelated to a firm's current debt ratio or a target. We find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples. Taken together, our findings suggest that a number of existing tests of target behavior have no power to reject alternatives.