A New Test of Capital Structure

Mayer, Colin; Sussman, Oren

doi:10.2139/ssrn.643388

Cited by 66 publications

(58 citation statements)

References 23 publications

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“…Our work most closely resembles that of Mayer and Sussman [2003], who also construct a sample of firms making large investments. They conclude that most large investments are initially financed by new debt, consistent with the pecking order theory of capital structure.…”

Section: Literature Reviewmentioning

confidence: 99%

“…They conclude that most large investments are initially financed by new debt, consistent with the pecking order theory of capital structure. Our study expands upon Mayer and Sussman [2003] by distinguishing between "built" capital expenditures and acquisitions, by examining sample firms' long-run equity performance, and by employing several alternate definitions of "major" investments.…”

Section: Literature Reviewmentioning

confidence: 99%

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Major Investments, Firm Financing Decisions, and Long-Run Performance

2006

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Major Investments, Firm Financing Decisions, and Long-Run Performance

2006

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“…These are capital expenditures that are larger in value than the norm in the firm's life (Mayer and Sussman (2004) …”

Section: Industry Code Each Year Nace (A Statistical Classification mentioning

confidence: 99%

Financial Flexibility Across the Euro Area and the UK

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AcknowledgementsWe would like to thank the participants of the internal seminar at the European Central Bank (ECB) and at the Eastern Finance Association Meeting 2013. We are also thankful to an anonymous referee for useful comments. This research was conducted while Marchica and Mura were visiting the ECB, whose hospitality and support are gratefully acknowledged. The views expressed in this paper only reflect those of the authors and should not be attributed to the ECB. Annalisa Ferrando (corresponding author)European Central Bank; e-mail: annalisa.ferrando@ecb.int Maria-Teresa Marchica University of ManchesterRoberto Mura University of Manchester 1 AbstractWe use a large database of more than 685,000 European firms to show that financial flexibility attained through conservative leverage policies is more important for private, small, medium-sized and young firms and for firms in countries with lower access to credit and weaker investor protection. Further, using the recent financial crisis as a natural experiment, we show that financial flexibility status allows companies to reduce the negative impact of liquidity shocks on their investment decisions. Our findings support the hypothesis that financial flexibility relates to companies' ability to undertake future investment, despite market frictions hampering possible profitable growth opportunities. JEL Classification: G31, G32, D92Keywords: low leverage, financial flexibility, investment, cross-country analysis 2 Non-technical summaryIn an environment where capital markets are imperfect and the cost of external financing increases, companies may implement a conservative leverage policy to maintain "substantial reserves of untapped borrowing power" as pointed out by Modigliani and Miller (1963). This may allow them to access the capital markets in the event of positive shocks to their investment opportunity set.The purpose of our study is twofold. First, we investigate how a conservative debt policy aimed at maintaining financial flexibility can enhance corporate investment ability. Second, we study the value of financial flexibility across a very heterogeneous sample of both publicly traded and privately held firms that vary substantially in size, age, and quality of institutional settings.Our analysis is based on a rich database of more than 685,000 firms from eight euro area countries and the UK. We first identify financially flexible firms (FF) as those that...

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“…For example, the actual stock repurchases often are executed over several years after the initial announcement of such plans. 5 For pecking order theories and empirical evidence, see Myers (1984), Myers and Majluf (1984), Narayanan (1988) Heinkel and Zechner (1990), ShyamSunder and Myers (1999), Fama and French (2002), Frank and Goyal (2003), Mayer and Sussman (2004), Lemmon and Zender (2010), and Leary and Roberts (2010), among others. For the tradeoff theories and empirical evidence, see DeAngelo and Masulis (1980), Harris and Raviv (1990), Titman and Wessels (1988), Stulz (1990), Titman (1993, 1994), Berens and Cuny (1995), Rajan and Zingles (1995), Jung et al (1996), Lang et al (1996) convention, we exclude all financial and utility firms (banking, insurance, real estate, trading, and utilities industries as defined by Fama and French, 1997).…”

Section: Datamentioning

confidence: 99%