Leaning against the wind: Debt financing in the face of adversity

Michael J. Brennan and Holger Kraft

No 119, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of the first two hypotheses, and provisionally accept the 'making the numbers' hypothesis that managers who are under pressure because of unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities, will rely more heavily on debt financing to boost earnings per share and return on equity.

Keywords: Capital structure; financing policy; managerial incentives (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Date: 2016, Revised 2016
New Economics Papers: this item is included in nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:119

DOI: 10.2139/ssrn.2696886

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