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How do firms make capital structure decisions? Evidence from acquisitions, buybacks and equity issues

Author: Vermaelen, Theo ; Xu, MoqiINSEAD Area: Finance Series: Working Paper ; 2010/58/FIN Publisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 64 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper tests whether major changes in capital structure as a result of acquisitions, share repurchases and equity issues are consistent with the prediction of empirical trade-off models of capital structure. The answer is affirmative for acquisitions and buybacks, but not for equity issues. The paper also asks whether deviations from predictions of the trade-off theory are driven by market timing. Here the answer is "yes" for all capital structure decisions, with one qualification: issuing overvalued stock in acquisitions is only possible if the financing choice can also be motivated by the trade-off theory.
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This paper tests whether major changes in capital structure as a result of acquisitions, share repurchases and equity issues are consistent with the prediction of empirical trade-off models of capital structure. The answer is affirmative for acquisitions and buybacks, but not for equity issues. The paper also asks whether deviations from predictions of the trade-off theory are driven by market timing. Here the answer is "yes" for all capital structure decisions, with one qualification: issuing overvalued stock in acquisitions is only possible if the financing choice can also be motivated by the trade-off theory.

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