Preview

Analysis on Shyam-Sunder and Myers, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure”, Jfe 1999

Good Essays
Open Document
Open Document
1281 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Analysis on Shyam-Sunder and Myers, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure”, Jfe 1999
Finance Seminar
Homework #1 Capital Structure
Shyam-Sunder and Myers, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure”, JFE 1999 1. What is the main research question of the paper?
The theory of capital structure has been dominated by the search for optimal capital structure. It predicts reversion of the actual debt ratio towards a target or optimum, and it predicts a cross-sectional relation between average debt ratios and asset risk, profitability, tax status and asset type. The empirical literature seems to confirm these two predictions but they have not checked the statistical power of their tests against alternative hypotheses, say, the pecking order model.

2. What are the main findings? (1) A simple pecking order model explains much more of the time-series variance in actual debt ratios than a target adjustment model based on the static trade-off theory. (2) The pecking order hypothesis can be rejected if actual financing follows the target-adjustment specification.

3. According to the following two equations, how to test the Pecking Order Theory? How to interpret a and bPO ? (1) DEFt = DIVt + Xt + DWt + Rt - Ct (2) DDit = a + bPO DEFit + eit Ct = operating cash flows, after interest and taxes DIVt = dividend payments Xt = capital expenditures DWt = net increase in working capital Rt = current portion of long-term debt at start of period Dt = long-term debt outstanding At = net book assets, including net working capital dt = Dt / At , the book debt ratio
As the pecking order model predicts, when firms need fund, they first consider internal fund, then low risk debt and new equity at last. So the changes in debt ratios are driven by the need for external funds. And DEF just represent the need for external fund. By running the regression on the second equation, we try to find the relationship between debt ratio and need for external fund. The intercept a stands for the debt change when the firm has no deficit or surplus.

You May Also Find These Documents Helpful

  • Powerful Essays

    Jong, Abe; Verbeek, Marno; Vervijmeren, Patrick; The Impact of Financing Surpluses and Large Financing Deficits on Tests of the Pecking Order Theory. Financial Management, Summer 2010, Vol. 39, Issue 2, pp. 733-56.…

    • 1780 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    Chapter 15 Mini Case

    • 1679 Words
    • 7 Pages

    The impact of capital structure on value depends on the effect that debt may have on…

    • 1679 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Baker and Wurgler (2002) have established that market timing plays an important role in practice in capital structure decisions. Market timing means that firms issue equity when it is expensive and buy it back when it is cheap. According to this theory, firms have no target debt-to-equity ratio, and the observed ratio is merely the result of past attempts to time the market (Baker and Wurgler,…

    • 915 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    fgjfgj

    • 1317 Words
    • 8 Pages

    Signaling Prospects Through Financing Decisions 11.29 Degree of Total Leverage 11.30 Dividend Theories 11.31 Dividend Growth Rate and the Effect of Changing Dividend Policy 11.32 Setting Dividends 11.33 Dividend Payment Procedures 11.34 Stock Dividends and Repurchases Corporate Finance - Effects of Debt on the Capital Structure Using Greater Amounts of Debt Recall that the main benefit of…

    • 1317 Words
    • 8 Pages
    Powerful Essays
  • Powerful Essays

    Capital Structure

    • 3633 Words
    • 15 Pages

    Harris, M. and Raviv, A. (1990), ‘Capital structure and the information role of debt’, Journal of Finance 46, 321–345.…

    • 3633 Words
    • 15 Pages
    Powerful Essays
  • Powerful Essays

    Maketing Strategies of Apple

    • 5742 Words
    • 19 Pages

    References: Agnihotri, A. (2013). Firms’ strategy and capital structure: solving pecking order and market timing theories’ often contradictory propositions, Corporate Finance Review, 17.5, 14-23…

    • 5742 Words
    • 19 Pages
    Powerful Essays
  • Powerful Essays

    Cotter, J., Peck S., 2001, The structure of debt and active equity investors: The case of…

    • 19740 Words
    • 79 Pages
    Powerful Essays
  • Better Essays

    Berger, A. N. and di Patti E. 2006, “Capital structure and firm performance: a new…

    • 10376 Words
    • 65 Pages
    Better Essays
  • Powerful Essays

    Bibliography: ❖ Debt and capital structure to measure the financial risk in company’s long-term capital structure. (FTC, 2008)…

    • 9077 Words
    • 37 Pages
    Powerful Essays
  • Powerful Essays

    Capital structure decisions: To M&M and beyond Introduction Modigliani and Miller’s proposition one states that by introducing debt financing does not change the value of the firm or the value of the firm’s cash-­‐flows but only the way that these cash-­‐flows of the firm are split between its debt and equity holders. This is the principle of conservation of value: “no change in the investment value of the enterprise as a whole would result from a change in its capitalization. ”[1]…

    • 5265 Words
    • 22 Pages
    Powerful Essays
  • Powerful Essays

    8. Haugen, R. A., and Wichem D. W. (1974). The Elasticity of Financial Assets, Journal of Finance (29)12, 29-4 9. Hill N. C. and Stone B.K.(1980). Accounting Betas, Systematic Operating Risk and Financial Leverage: A Risk Composition Approach to the determinants of Systematic Risk, Journal of Financial and Quantitative Analysis, 595-633 10. Hittle, L. C., Haddad, K., and Gitman (1992). Over the counter firms, asymmetric information and financing preference, Review of Financial Economics, 2(1), 81 81-92 11. James, C. (1987). Some evidence on the uniqueness of bank loans, Journal of Financial Economics, 19(2), 217-235 12. Kane, E.J., Marcus A. J. and McDonald R.L. (1985). Debt Policy and the Rate of Return Premium to , Leverage, Journal of Financial and Quantitative Analysis, (28)2, 479-500 479 13. Klapper, Leora & Tzioumis, Konstantinos, 2008. "Taxation and capital structure : evidence from a evide transition economy," Policy Research Working Paper Series 4753, The World Bank. 14. Miller, M.H. (1977). Debt and Taxes. Journal of Finance, 32(2), 261-275 261 15. Modigliani, F. and Miller, M (1958). The cost of capital, Corporate finance, and the theory of investment, American Economic Review 48, 261-297 261 16. Myers, S.C. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575-592 575 592 17. Myers, S.C. (2001). Capital structure. Journal of Economics Perspectives, 15(2),81 15(2),81-102…

    • 3748 Words
    • 15 Pages
    Powerful Essays
  • Powerful Essays

    Kesseven Padachi C

    • 9686 Words
    • 52 Pages

    Myers, S.C. (1984). ‘The capital structure puzzle’, Journal of Finance, Vol. 39 No. 3, pp. 575-92.…

    • 9686 Words
    • 52 Pages
    Powerful Essays
  • Powerful Essays

    strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.…

    • 13964 Words
    • 56 Pages
    Powerful Essays
  • Satisfactory Essays

    Fan, J. P. H., Titman, S. & Twite, G. (2012) An International Comparison of Capital Structure and Debt Maturity Choices ebscohost.com [online]. Available at:…

    • 471 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    The tradeoff theory predicts that temporary fluctuations in the market-to-book ratio or any other variable should have temporary effects. The evidence however indicates long-term effects as well. The standard pecking-order theory implies that periods of high investment will push leverage higher toward a debt capacity, not lower as the results in this paper suggest. The theory of entrenched managers suggests that managers exploit existing investors ex post by not rebalancing the capital structure with debt, this may be an explanation of…

    • 1532 Words
    • 7 Pages
    Better Essays

Related Topics