Dynamics of Corporate Capital Structure Choices : A Re-Conciliatory View and Tests

Purpose:- In contrast to a 'point of view' theory, a unifying view fits different view points in firms' financing choices. It requires reconciliation of the points of views. We work on that end and examine the same with Indian firms' data empirically.Methods:- Given that CFOs show dynamic changes in 'points of view' and shift from one track to other, we propose that in dynamic recapitalization, high (low)-value firms approach towards the Dynamic Trade-Off (DTO)-track form debt-revisions in the Static Trade-Off (STO)-track and Pecking Order (PO)-track. We define debt-revisions in STO, PO and DTO-track. In dynamic panel data of cubic specification, STO and PO debt-revisions are regressed on DTO debt-revisions, on equity issues, and on their joint effects. The proxy variables are defined and tests on robustness are performed.Results:- The both debt-revisions in STO and PO-track of high-value firms contribute dynamic effects on DTO debt-revisions in separating equilibrium of 'corner' type while low-value firms' PO-revisions only show dynamic revisions in semi-separating equilibrium. On equity issues, high-value firms retain the equilibrium while low-value firms revert to separating equilibrium of 'general' type with dynamic effects of PO-revisions only. On the joint effects, high-value firms' size of recapitalization costs and STO or PO debt-revisions show dynamic effects with consistent equilibrium while low-value firms' bankruptcy risk and PO-revisions show dynamic effects in semi-separating equilibrium. Robustness tests confirm the above dynamic effects.Conclusion:- The reconciliatory view is plausible with little modification in effect empirically. High-value firms' STO / PO debt-revisions lead to dynamics in DTO-track while low-value firms' PO debt-revisions only approach to DTO-track.Applicative Value:- No single theory can justify the real environment the CFOs face. They may follow some reconciliation in their dynamic capital structure choices over time