Two essays on capital structure
This dissertation consists of two essays on capital structure. Essay one, joint with Sheridan Titman, examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm’s history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure. Essay two examines how managerial entrenchment, defined here as the extent to which managers can act in their self-interest, influences the levels of and changes in debt ratios. Consistent with prior research, I find that entrenched managers prefer lower leverage. Analyses of financing decisions indicate that they achieve lower debt ratios by issuing more equity and retaining more profits. Debt issuance, however, does not appear to be influenced by entrenchment. Examination of leverage changes suggests that increases in debt ratios in response to external financing needs are similar for all types of managers. Finally, building on the documented market timing effect on capital structure, I find that decreases in leverage due to equity issuance following increases in stock prices are greater when managers are entrenched.