Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T13:26:03.827Z Has data issue: false hasContentIssue false
  • English
  • Français

The Intertemporal Behavior of Corporate Debt Policy

Published online by Cambridge University Press:  19 October 2009

James S. Ang
Get access Rights & Permissions [Opens in a new window]

Extract

This study provides, as a result of comprehensive search, a better description of the intertemporal behaviors of corporate debt policy, comparable to those that exist for dividend policy. Although leverage policy may vary a great deal from firm to firm, we found that: (1) The rather simple partial adjustment model with constant payout ratio to have the best predictive performance and other superior models include the first-order markov process and the historical average leverage ratio; (2) in general, firms seem to operate with a concept of “target leverage ratio,” e.g., target ratio computed from the partial adjustment models, or from historical or industry averages; (3) there is some weak evidence of the presence of unused debt capacity for the total sample; (4) the average speed of adjustment to close the gap between the desired and actual leverage ratio is a respectable 67 percent in the first year (due to the lumpiness of debt issue, individual firms tend to be either under or overadjusted); (5) there are some indications that firms also adjust debt behavior to anticipated future increases or decreases in assets.

There are several areas for future research, for instance, the best debt model could serve as the first stage of a possible two-stage equation in the empirical verification of the MSM's assumption of the independence of the investment decision to the financing decision (e.g., [7]), on a further exploration of how firms' expectations affect debt behavior. Finally, the existence of a rational target leverage ratio should encourage research interest concerning the existence of an empirically testable optimal leverage ratio.

Type
V. Financial Management
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 4 , November 1976 , pp. 555 - 566
Copyright
Copyright © School of Business Administration, University of Washington 1976

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Ang, James. “Dividend Policy: Information Content or Partial Adjustment?” The Review of Economics and Statistics, February 1975, pp. 65–70.CrossRefGoogle Scholar
[2]Barges, Alexander. The Effect of Capital Structure on the Cost of Capital. Englewood Cliffs, N.J.: Prentice-Hall, 1963.Google Scholar
[3]Baxter, Nevins D. “Leverage, Risk of Ruin and the Cost of Capital.” Journal of Finance, vol. 22, no. 3 (September 1967), pp. 395–403.Google Scholar
[4]Baxter, Nevins D., and Cragg, John G.. “Corporate Choice among Long-Term Financing Instruments.” The Review of Economics and Statistics, August 1970, pp. 225–235.CrossRefGoogle Scholar
[5]Crockett, Jean, and Friend, Irwin. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57: Comment.” The American Economic Review, vol. 57, no. 5 (December 1967), pp. 1258–1267.Google Scholar
[6]Donaldson, Gordon. Corporate Debt Policy. Boston, Mass.: Graduate School of Business Administration, Harvard University, 1961.Google Scholar
[7]Fama, Eugene F. “The Empirical Relationships between the Dividend and Investment Decisions of the Firm.” The American Economic Review, June 1974, pp. 305–318.Google Scholar
[8]Fama, Eugene F. “Short-Term Interest Rates as Predictors of Inflation.” The American Economic Review, June 1975.Google Scholar
[9]Gordon, Myron J. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57: Comment.” The American Economic Review, vol. 57, no. 5 (December 1967), pp. 1267–1278.Google Scholar
[10]Hannan, E. J.Multiple Time Series. New York: John Wiley and Sons, Inc., 1970.CrossRefGoogle Scholar
[11]Lev, Baruch, and Pekelman, Dov. “A Multiperiod Adjustment Model for the Firm's Capital Structure.” Journal of Finance, March 1975, pp. 75–92.CrossRefGoogle Scholar
[12]Lintner, John. “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes.” The American Economic Review, May 1956, pp. 97–113.Google Scholar
[13]Martin, John D., and Scott, David F. Jr. “A Discriminant Analysis of the Corporate Debt-Equity Decision.” Financial Management, Winter 1974, pp. 71–79.CrossRefGoogle Scholar
[14]Modigliani, Franco, and Miller, Merton. “Some Estimates of the Cost of Capital to the Electric Industry, 1954–57.” The American Economic Review, vol. 56, no. 3 (June 1966), pp. 333–391.Google Scholar
[15]Modigliani, Franco. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57: Reply.” The American Economic Review, vol. 57, no. 5 (December 1967), pp. 592–595.Google Scholar
[16]Robichek, Alexander A.; McDonald, John G.; and Higgins, Robert C.. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57: Comment.” The American Economic Review, vol. 57, no. 5 (December 1967), pp. 1278–1288.Google Scholar
[17]Scott, David F. Jr. “Evidence on the Importance of Financial Structure.” Financial Management, Summer 1972, pp. 45–50.CrossRefGoogle Scholar
[18]Scott, James H. “A Theory of Optimal Capital Structure.” The Bell Journal of Economics, Spring 1976, pp. 33–54.CrossRefGoogle Scholar
[19]Stiglitz, J. E. “Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Takeovers.” The Bell Journal of Economics, Autumn 1972, pp. 458–482.Google Scholar
[20]Taub, Allan. “The Determinants of the Firm's Capital Structure.” The Review of Economics and Statistics, November 1975.CrossRefGoogle Scholar
[21]Theil, Henri. Applied Economic Forecasting. Amsterdam, Netherlands: North Holland Publishing Company, 1966.Google Scholar
[22]Toy, Norman; Stonehall, Arthur; Remmens, Lee; Wright, Richard; and Beekhuisen, Theo. “A Comparative International Study of Growth, Profitability, and Risk as Determinants of Corporate Debt Ratios in the Manufacturing Sector.” Journal of Financial and Quantitative Analysis, November 1974, pp. 875–886.CrossRefGoogle Scholar
[23]Weston, J. Fred. “A Test of Cost of Capital Propositions.” Southern Economic Journal, vol. 30 (October 1963), pp. 105–112.CrossRefGoogle Scholar