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The Debt-Equity Choice

Armen Hovakimian, Tim Opler and Sheridan Titman
The Journal of Financial and Quantitative Analysis
Vol. 36, No. 1 (Mar., 2001), pp. 1-24
DOI: 10.2307/2676195
Stable URL: http://www.jstor.org/stable/2676195
Page Count: 24
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The Debt-Equity Choice
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Abstract

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, our tests explicitly account for the fact that firms may face impediments to movements toward their target ratio, and that the target ratio may change over time as the firm's profitability and stock price change. A separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision.

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