Leaning Against the Wind: Debt Financing in the Face of Adversity

We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this “leaning against the wind” and consider three possible explanations: market timing, precautionary financing, and “makin...

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Bibliographic Details
Main Authors: Brennan, M.J (Author), Kraft, H. (Author)
Format: Article
Language:English
Published: John Wiley and Sons Inc. 2018
Online Access:View Fulltext in Publisher
Description
Summary:We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this “leaning against the wind” and consider three possible explanations: market timing, precautionary financing, and “making the numbers.” We find no evidence in favor of the first two hypotheses, and provisionally accept the making the numbers hypothesis that managers who are under pressure due to unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities will rely more heavily on debt financing to boost earnings per share and return on equity. © 2018 Financial Management Association International.
ISBN:00463892 (ISSN)
DOI:10.1111/fima.12227