Default probability plays a central role in the static trade-off theory of capital structure. We directly test this theory by regressing the probability of default on proxies for costs and benefits of debt. Contrary to predictions of the theory, firms with higher bankruptcy costs, i.e., smaller...

Recent research has focused on the estimates of the speed of adjustment to target leverage as the indicators of the importance of dynamic trade-off behavior. We show that the observed corporate financing behavior and the resulting dynamics of corporate debt ratios are such that the speed of...

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This project seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk shifting occurs on average,...

The paper examines whether security issues and repurchases adjust the capital structure toward the target. The time-series patterns of debt ratios imply that only debt reductions are initiated to offset the accumulated deviation from target leverage. The importance of target leverage in earlier...

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, out tests explicitly account for the fact that firms may face impediments...

Contrary to Baker and Wurgler (2002), I find that the importance of historical average market-to-book ratios in leverage regressions is not due to past equity market timing. Although equity transactions may be timed to equity market conditions, they do not have significant long lasting effects...

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk shifting occurs on average,...