Linda Deangelo

Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic capital structure model with these features and find that it replicates industry leverage very well, explains debt issuances/repayments better than extant tradeoff models, and accounts for the leverage changes accompanying investment "spikes." It generates leverage ratios with slow average speeds of adjustment to target, which are dampened by intentional temporary movements away from target, not debt issuance costs.

Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic capital structure model with these features and find that it replicates industry leverage very well, explains debt issuances/repayments better than extant tradeoff models, and accounts for the leverage changes accompanying investment "spikes." It generates leverage ratios with slow average speeds of adjustment to target, which are dampened by intentional temporary movements away from target, not debt issuance costs.

The decision to conduct an SEO reflects both market-timing opportunities and economic fundamentals, as implied by a simple lifecycle story in which growth firm status drives the decision to sell stock, with the lifecycle effect empirically stronger. For example, our estimates indicate that the probability of an SEO by a firm listed for one year with poor market-timing opportunities exceeds by 71% the issuance probability for a firm listed for at least 20 years with excellent timing opportunities (6.5% versus 3.8%). Neither market timing nor lifecycle stage provides an empirically viable "stand-alone" explanation of the decision to sell stock because (i) an overwhelming majority of firms with excellent market-timing opportunities fail to exploit them, and (ii) a non-trivial portion of SEO activity comes from firms beyond the growth stage. Since without the offer proceeds 62.6% of issuers would be forced to alter their operating and/or financing decisions to avoid running out of cash, the primary reason for the SEO is a near-term cash need, not the ability to sell stock at a high price.

The decision to conduct an SEO reflects both market-timing opportunities and economic fundamentals, as implied by a simple lifecycle story in which growth firm status drives the decision to sell stock, with the lifecycle effect empirically stronger. For example, our estimates indicate that the probability of an SEO by a firm listed for one year with poor market-timing opportunities exceeds by 71% the issuance probability for a firm listed for at least 20 years with excellent timing opportunities (6.5% versus 3.8%). Neither market timing nor lifecycle stage provides an empirically viable "stand-alone" explanation of the decision to sell stock because (i) an overwhelming majority of firms with excellent market-timing opportunities fail to exploit them, and (ii) a non-trivial portion of SEO activity comes from firms beyond the growth stage. Since without the offer proceeds 62.6% of issuers would be forced to alter their operating and/or financing decisions to avoid running out of cash, the primary reason for the SEO is a near-term cash need, not the ability to sell stock at a high price.

We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner [1956] and Miller and Modigliani [1961]. We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen [1986]) and security valuation problems (as in Myers and Majluf [1984]) does a good job explaining the main features of observed payout policies --- i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors’ behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.