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The Debt-Equity Choice

Published online by Cambridge University Press:  06 April 2009

Armen Hovakimian ,
Tim Opler  and
Sheridan Titman
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Abstract

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio, and that the target ratio may change over time as the firm's profitability and stock price change. A separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 1 , March 2001 , pp. 1 - 24
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Hovakimian, Baruch College, CUNY, 17 Lexington Ave, Box E-0933, New York, NY 10010; Opler, WR Hambrecht & Co., 1 World Trade Center, Ste 3335, New York, NY 10048; and Titman, University of Texas, College of Business Administration, Austin, TX 78712 and NBER. We acknowledge helpful comments from seminar participants at Cornell University, Georgia Institute of Technology, McGill University, Dartmouth college, University of Chicago, University of Michigan, University of North Carolina, University of Rhode Island, University of Texas, University of Washington, and the NBER. We also thank Jonathan Karpoff (the editor) and an anonymous referee.

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