Management of capital structure is an important part of maximizing the firm value. Financial rese... more Management of capital structure is an important part of maximizing the firm value. Financial research has proposed many theories that explain aspects of firm behavior when a firm makes financial decisions that change the firm's capital structure. However, none of the theories fully explain why firms with similar fundamental characteristics make different financing choices. This study focuses on what motivates managers when they are making external financing decisions. It investigated whether the motivation for the decisions about capital structure are driven by market timing or managerial overoptimism. This is done by focusing on equity and debt issues and whether these issues bring the firms closer to or farther away from their optimal capital structure. This study finds that the excess leverage proxy is negatively and significantly related to the one, two, and three year post-financing buy-and-hold abnormal returns even when firm characteristics are controlled. These results are also found when nonissuing matched firms, small firms, and large firms are analyzed. These results are consistent with the Managerial Overoptimism Theory. The results of this study also show that in the first post-financing year firms that issue equity when they are predicted to issue debt significantly out-perform APPROVAL FOR SCHOLARLY DISSEMINATION The author grants to the Prescott Memorial Library of Louisiana Tech University the right to reproduce, by appropriate methods, upon request, any or all portions of this Dissertation. It is understood that "proper request" consists of the agreement, on the part of the requesting party, that said reproduction is for his personal use and that subsequent reproduction will not occur without written approval of the author of this Dissertation. Further, any portions of the Dissertation used in books, papers, and other works must be appropriately referenced to this Dissertation.
Management of capital structure is an important part of maximizing the firm value. Financial rese... more Management of capital structure is an important part of maximizing the firm value. Financial research has proposed many theories that explain aspects of firm behavior when a firm makes financial decisions that change the firm's capital structure. However, none of the theories fully explain why firms with similar fundamental characteristics make different financing choices. This study focuses on what motivates managers when they are making external financing decisions. It investigated whether the motivation for the decisions about capital structure are driven by market timing or managerial overoptimism. This is done by focusing on equity and debt issues and whether these issues bring the firms closer to or farther away from their optimal capital structure. This study finds that the excess leverage proxy is negatively and significantly related to the one, two, and three year post-financing buy-and-hold abnormal returns even when firm characteristics are controlled. These results are also found when nonissuing matched firms, small firms, and large firms are analyzed. These results are consistent with the Managerial Overoptimism Theory. The results of this study also show that in the first post-financing year firms that issue equity when they are predicted to issue debt significantly out-perform APPROVAL FOR SCHOLARLY DISSEMINATION The author grants to the Prescott Memorial Library of Louisiana Tech University the right to reproduce, by appropriate methods, upon request, any or all portions of this Dissertation. It is understood that "proper request" consists of the agreement, on the part of the requesting party, that said reproduction is for his personal use and that subsequent reproduction will not occur without written approval of the author of this Dissertation. Further, any portions of the Dissertation used in books, papers, and other works must be appropriately referenced to this Dissertation.
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