Target Behavior and Financing: How Conclusive Is the Evidence?

Xin Chang · Sudipto Dasgupta

275 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Analysis and Corporate Governance Fiscal Policies and Political Economy

Abstract

ABSTRACT The notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance. Yet, how definitive is the evidence? We address this issue by generating samples where financing is unrelated to a firm's current debt ratio or a target. We find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples. Taken together, our findings suggest that a number of existing tests of target behavior have no power to reject alternatives.

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References

1973Risk, Return, and Equilibrium: Empirical Tests 1995What Do We Know about Capital Structure? Some Evidence from International Data 1988The Determinants of Capital Structure Choice 2001The theory and practice of corporate finance: evidence from the field 1991The Theory of Capital Structure 2002Market Timing and Capital Structure 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 1984The Capital Structure Puzzle

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