The Debt-Equity Choice: An Analysis of Issuing Firms

This paper compares the characteristics of U.S. firms which issued equity between 1976 and 1993 to those which increased their use of debt financing. We find that fims are most likely to issue debt when they have less debt than ispredicted by a cross-sectional model. In addition, firms that were very profitable prior to the issue were more likely to increase their use of debt financing and those that accumulated loses tended to issue equity. Our results also confirm previous findings that firms are most likely to issue equity after experiencing a rise in their share price. In contrast to our other findings, this last result appears to be inconsistent with the hypothesis that firms select their capital structures by trading off tax and other advantages of debt financing with financial distress and other costs associated with debt. Results on samples stratified by different proxies for asymmetric information fails to support asymmetric information based explanations for this phenomena.