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Debt Capacity and Tests of Capital Structure Theories

Published online by Cambridge University Press:  17 August 2010

Michael L. Lemmon  and
Jaime F. Zender
Michael L. Lemmon
Affiliation:
Eccles School of Business, University of Utah, 1645 E. Campus Center Dr., Rm. 109, Salt Lake City, UT 84112. finmll@business.utah.edu.
Jaime F. Zender
Affiliation:
Leeds School of Business, University of Colorado at Boulder, UCB 419, Boulder, CO 80309. jaime.zender@colorado.edu.
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 5 , October 2010 , pp. 1161 - 1187
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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