Capital structure and large investment projects

Evan Dudley

Journal of Corporate Finance, 2012, vol. 18, issue 5, 1168-1192

Abstract: This paper provides empirical evidence that lumpy investment projects provide firms with the opportunity to adjust leverage at low marginal cost. Consistent with a theoretical model, I find that 1) firms sequence equity before debt during the financing period of their investment projects, and 2) that firms adjust their leverage ratios toward their target leverage during these investment periods. I also show that proactive increases in leverage observed in other studies can be explained by the evolution of firms' target leverage ratios over the financing period of a project. My results are consistent with trade-off theory and imply that firms move toward their target capital structures when they invest.

Keywords: Capital structure; Lumpy investment; Leverage; Adjustment costs; Financing deficit; Market timing (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:5:p:1168-1192

DOI: 10.1016/j.jcorpfin.2012.07.007

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