‘Hot’ Debt Markets and Capital Structure |
| |
Authors: | John A. Doukas Jie Guo Bilei Zhou |
| |
Affiliation: | 1. School of Business and Public Administration, Old Dominion University, Norfolk, VA 23529‐0218, USA, and Judge Business School, Cambridge University, Cambridge CB2 1AG, U.K. E‐mail: jdoukas@odu.edu;2. Durham Business School, University of Durham, DH1 3LB, Durham, U.K. E‐mail: jie.guo@durham.ac.uk;3. Business School, Central South University, Changsha, 410083, P. R. China E‐mail: bileizhou@msn.com |
| |
Abstract: | This paper examines the motives of debt issuance during hot‐debt market periods and its impact on capital structure over the period 1970–2006. We find that perceived capital market conditions as favourable, an indication of market timing, and adverse selection costs of equity (i.e., information asymmetry) are important frictions that lead certain firms to issue more debt in hot‐ than cold‐debt market periods. Using alternative hot‐debt market issuance measures and controlling for other effects, such as structural shifts in the debt market, industry, book‐to‐market, price‐to‐earnings, size, tax rates, debt market conditions and adjustment costs based on debt credit ratings, we find that firms with high adverse selection costs issue substantially more (less) debt when market conditions are perceived as hot (cold). Moreover, the results indicate that there is a persistent hot‐debt market effect on the capital structure of debt issuers; hot‐debt market issuing firms do not actively rebalance their leverage to stay within an optimal capital structure range. |
| |
Keywords: | hot debt markets information asymmetry capital structure market timing G12 G14 G31 G32 |
|
|