The effect of market conditions on capital structure adjustment

Murray Z. Frank, Vidhan K. Goyal

Research output: Contribution to journalArticlepeer-review

61 Scopus citations


The empirical implications of the trade-off theory, the market timing theory, and Welch's theory [Journal of Political Economy (in press)] of capital structure are examined using aggregate US data for 1952 to 2000. There is a long-run leverage ratio to which the system reverts. Deviations from that ratio help to predict debt adjustments, but not equity adjustments. A high market-to-book ratio is associated with subsequent debt reduction, but there is no effect in the equity market.

Original languageEnglish (US)
Pages (from-to)47-55
Number of pages9
JournalFinance Research Letters
Issue number1
StatePublished - Mar 1 2004

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