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Target behavior and financing: how conclusive is the evidence?

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Published
<mark>Journal publication date</mark>08/2009
<mark>Journal</mark>Journal of Finance
Issue number4
Volume64
Number of pages30
Pages (from-to)1767-1796
Publication StatusPublished
<mark>Original language</mark>English

Abstract

The notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance. Yet, how definitive is the evidence? We address this issue by generating samples where financing is unrelated to a firm's current debt ratio or a target. We find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples. Taken together, our findings suggest that a number of existing tests of target behavior have no power to reject alternatives.