This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (−),...

This paper is a study of the financing actions by firms to adjust leverage: debt reductions, stock sales, debt issues, and stock purchases. Each type of action is positively autocorrelated. The standard empirical models of corporate leverage produce leverage targets that do not correctly predict...

The inverse relation between leverage and profitability is widely regarded as a serious defect of the tradeoff theory. We show that the defect is not with the theory but with the use of a leverage ratio in which profitability affects both the numerator and the denominator. Profitability directly...

This paper provides a survey of the trade-off theory of corporate capital structure. First we provide an analysis of an equilibrium version of the theory. The firm raises debt from an investor. Debt provides interest tax shields but raises the probability of costly bankruptcy. The model provides...