A Rising Market and Capital Structure Decisions

doi:10.13189/ujaf.2017.050404

Journals Information

Universal Journal of Accounting and Finance Vol. 5(4), pp. 102 - 108
DOI: 10.13189/ujaf.2017.050404
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A Rising Market and Capital Structure Decisions

Hui Yang ¹, Mohammad Meysami ², Alex Meisami ³^,*
¹ Financial Analyst at Indratech LLC, Elkhart, Indiana, USA
² Ph.D. Candidate, Department of Mathematical and Statistical Sciences, University of Colorado Denver, USA
³ Associate Professor of Finance, Leighton School of Business and Economics, Indiana University South Bend, USA

ABSTRACT

This paper examines capital structure decisions in the 1990s. We test a number of capital structure theories and find notable differences between investment- and junk-grade issuers in this period. Consistent with the trade-off theory, 67% of junk-grade issues were equity as opposed to only 9% of investment-grade issues. In addition, consistent with the trade-off theory, for junk-grade issuers, we find a direct relationship between collateral and debt issuance and an inverse relationship between debt issuance and the treasury yield. However, contrary to the predictions of the trade-off theory, we do not find similar evidence for investment-grade issuers. Moreover, our analysis suggests that junk-grade issuers are concerned with the wealth-transfer consequences of choosing equity over debt; this does not seem to be the case for investment-grade issuers. We find some evidence in support of market timing and little evidence for the pecking order theory or the equity undervaluation hypothesis.

KEYWORDS
Capital Structure, Junk-grade, Investment-grade

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Hui Yang , Mohammad Meysami , Alex Meisami , "A Rising Market and Capital Structure Decisions," Universal Journal of Accounting and Finance, Vol. 5, No. 4, pp. 102 - 108, 2017. DOI: 10.13189/ujaf.2017.050404.

(b). APA Format:
Hui Yang , Mohammad Meysami , Alex Meisami (2017). A Rising Market and Capital Structure Decisions. Universal Journal of Accounting and Finance, 5(4), 102 - 108. DOI: 10.13189/ujaf.2017.050404.