Corporate financing and target behavior: New tests and evidence

Author Topic: Corporate financing and target behavior: New tests and evidence  (Read 130 times)

Offline kamruzzaman.bba

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This study addresses the recent concerns in the capital structure literature about the reliability of tests of the target-following behavior. Using a novel testing strategy, we examine whether and to what extent firms' financing choices–rather than the movement of their debt ratios per se – concur with the target-following behavior. We find that firms' financing decisions are not generally consistent with systematic target-following. Our results remain similar when we examine an extended period of time and also when we consider that firms may have a range of target debt ratios rather than a unique target or varying financial constraints. Our results are also robust to different target specifications and our methodology can reliably distinguish the target behavior from random financing. Further tests also confirm our results by suggesting that the firms' financing decisions are not primarily driven by deviations from the firms' target debt ratios.

Highlights
• We address the concerns of reliable target behavior testing in the past literature and offer a new strategy to do so.
• Instead of focusing debt ratio movements, we examine whether firms’ financing choices are consistent with target behavior.
• We find that these financing choices are not generally consistent with a systematic target behavior.
• We find that the firms’ financing choices are not primarily influenced by the deviations from their target debt ratios.
• Our methodology distinguishes target behavior from random financing behavior successfully.

https://www.sciencedirect.com/science/article/pii/S0929119916301900
Md. Kamruzzaman Didar
Assistant Professor & Head
Department of Innovation and Entrepreneurship
Faculty of Business & Entrepreneurship

Offline Shakil Ahmad

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Re: Corporate financing and target behavior: New tests and evidence
« Reply #1 on: May 08, 2018, 12:24:55 PM »
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