It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

We survey 401 financial executives, and conduct in-depth interviews with an additional 20, to determine the key factors that drive decisions related to reported earnings and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for outsiders, even more so than cash flows. Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target. The preference for smooth earnings is so strong that 78 % of the surveyed executives would give up economic value in exchange for smooth earnings. We find that 55 % of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter’s consensus earnings. Missing an earnings target or reporting volatile earnings is thought to reduce the predictability of earnings, which in turn reduces stock price because investors and analysts hate uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management’s views provide support for stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence in support of other

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This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision making that appear to indicate general differences in “style” across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

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We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

We use a simple model to outline the conditions under which corporate investment is sensitive to non-fundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of “equity dependent ” firms – firms that need external equity to finance marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales [1997], we find support for this hypothesis. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile.

We empirically examine the trade-off theory of capital structure, allowing for costly adjustment. After confirming that financing behavior is consistent with the presence of adjustment costs, we use a dynamic duration model to show that firms behave as though adhering to a dynamic trade-off policy in which they actively rebalance their leverage to stay within an optimal range. We find that firms respond to changes in their equity value, due to price shocks or equity issuances, by adjusting their leverage over the two to four years following the change. The presence of adjustment costs, however, often prevents this response from occurring immediately, resulting in shocks to leverage that have a persistent effect. Our evidence suggests that this persistence is more likely a result of optimizing behavior in the presence of adjustment costs, as opposed to market timing or indifference.

We examine the dynamic behavior of corporate capital structures in order to determine the empirical relevance of recent theories. We begin by showing that capital structure is highly persistent, so much so that the cross-sectional distribution of leverage in the year prior to the IPO is largely unchanged almost twenty years later. Moreover, our analysis suggests that market timing (Baker and Wurgler (2002)) and inertia (Welch (2004)) are unlikely explanations for the observed cross-sectional variation in capital structures, which exists prior to firms ’ IPOs. Rather, our results indicate that factors associated with debt policy have significant and long lasting effects on capital structure, as opposed to factors associated with equity policy. Further analysis of capital structures at the time of and prior to the IPO reveal heterogeneity in private financing decisions and debt contracts consistent with segmented capital markets. While suggestive, ultimately our results suggest a critical need for understanding variation in corporate debt policies and the determination of private firms ’ capital structures in order to better understand public firms ’ capital structures, the latter of which are largely a reflection of the former. A common theme among recent investigations into corporate capital structure is the

In the presence of frictions, firms adjust their capital structure infrequently. As a consequence, in a dynamic economy the leverage of most firms is likely to differ from the “optimum ” leverage at the time of readjustment. This paper explores the empirical implications of this observation. I use a calibrated dynamic trade-off model to simulate firms ’ capital structure paths. The results of standard cross-sectional tests on these data are consistent with those reported in the empirical literature. In particular, the standard interpretation of some test results leads to the rejection of the underlying model. Taken together, the results suggest a rethinking of the way capital structure tests are conducted. RECENT EMPIRICAL RESEARCH IN CAPITAL STRUCTURE focuses on regularities in the cross section of leverage to discriminate between various theories of financing policy. In this research, book and market leverage are related to profitabil-ity, book-to-market, and firm size. Changes in market leverage are largely ex-plained by changes in equity value. Past book-to-market ratios predict current