Year: 2004
Type: dissertation
Abstract: This dissertation consists of two essays on capital structure. Essay one, joint with \nSheridan Titman, examines how cash flows, investment expenditures and stock price \nhistories affect corporate debt ratios. Consistent with earlier work, we find that these \nvariables have a substantial influence on changes in capital structure. Specifically, stock \nprice changes and financial deficits (i.e., the amount of external capital raised) have \nstrong influences on capital structure changes, but in contrast to previous conclusions, we \nfind that their effects are subsequently at least partially reversed. These results indicate \nthat although a firm’s history strongly influence their capital structures, that over time, \nfinancing choices tend to move firms towards target debt ratios that are consistent with \nthe tradeoff theories of capital structure. \nEssay two examines how managerial entrenchment, defined here as the extent to \nwhich managers can act in their self-interest, influences the levels of and changes in debt \nratios. Consistent with prior research, I find that entrenched managers prefer lower \nleverage. Analyses of financing decisions indicate that they achieve lower debt ratios by \nissuing more equity and retaining more profits. Debt issuance, however, does not appear \nto be influenced by entrenchment. Examination of leverage changes suggests that \nincreases in debt ratios in response to external financing needs are similar for all types of \nmanagers. Finally, building on the documented market timing effect on capital structure, \nI find that decreases in leverage due to equity issuance following increases in stock prices \nare greater when managers are entrenched.
Author: Ayla Kayhan
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1795066036