The debt-equity choice

When firms adjust their capital structures, they tend to move toward a targ et debt ratio that is consistent with theories based on tradeoffs between t he costs and benefits of debt. In contrast to previous empirical work, our tests explicitly account for the fact that firms may face impediments to mo vements toward their target ratio, and that the target ratio may change ove r time as the firm's profitability and stock price change. A separate analy sis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important r ole in the repurchase decision than in the issuance decision.