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The Decision of Debt or Equity Financing

Parsonage, Matthew LU and Berglund, Joakim LU (2017) NEKP03 20171
Department of Economics
Abstract
Different approaches have been used to test capital structure theories empirically. In this paper the statement that Myers and Majluf (1984) discussed, that a low risk debt issue should affect the firm value less than a high risk equity issue, is explored and tested by applying an event study approach similar to the one Eckbo (1986) carried out on different kinds of debt issuances. There are also some important assumptions are tested for comparable reasons. A sample of all firms on the NYSE from the period January, 1 in 2007 to December, 31 in 2012 is used. The findings are that the Pecking Order Theory holds rather well when looking at a two-day event window from issuance announcements of debt and equity. The Traditional Trade-off Theory... (More)
Different approaches have been used to test capital structure theories empirically. In this paper the statement that Myers and Majluf (1984) discussed, that a low risk debt issue should affect the firm value less than a high risk equity issue, is explored and tested by applying an event study approach similar to the one Eckbo (1986) carried out on different kinds of debt issuances. There are also some important assumptions are tested for comparable reasons. A sample of all firms on the NYSE from the period January, 1 in 2007 to December, 31 in 2012 is used. The findings are that the Pecking Order Theory holds rather well when looking at a two-day event window from issuance announcements of debt and equity. The Traditional Trade-off Theory also holds, but only under the fairly rough assumption that specific firms have very different capital structure value adding-optima. Interestingly, it is found that the market reaction effect of an announcement is delayed by one day and only visible on the day after the announcement. (Less)
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author
Parsonage, Matthew LU and Berglund, Joakim LU
supervisor
organization
alternative title
An Empirical Examination of Capital Structure Theories
course
NEKP03 20171
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Capital Structure, Pecking Order Theory, Traditional Trade-off Theory
language
English
id
8910591
date added to LUP
2017-06-13 14:45:52
date last changed
2017-06-13 14:45:52
@misc{8910591,
  abstract     = {Different approaches have been used to test capital structure theories empirically. In this paper the statement that Myers and Majluf (1984) discussed, that a low risk debt issue should affect the firm value less than a high risk equity issue, is explored and tested by applying an event study approach similar to the one Eckbo (1986) carried out on different kinds of debt issuances. There are also some important assumptions are tested for comparable reasons. A sample of all firms on the NYSE from the period January, 1 in 2007 to December, 31 in 2012 is used. The findings are that the Pecking Order Theory holds rather well when looking at a two-day event window from issuance announcements of debt and equity. The Traditional Trade-off Theory also holds, but only under the fairly rough assumption that specific firms have very different capital structure value adding-optima. Interestingly, it is found that the market reaction effect of an announcement is delayed by one day and only visible on the day after the announcement.},
  author       = {Parsonage, Matthew and Berglund, Joakim},
  keyword      = {Capital Structure,Pecking Order Theory,Traditional Trade-off Theory},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Decision of Debt or Equity Financing},
  year         = {2017},
}