Target Behavior and Financing: How Conclusive Is the Evidence?
- Author(s): XIN CHANG, SUDIPTO DASGUPTA
- Published: Jul 16, 2009
- Pages: 1767-1796
- DOI: 10.1111/j.1540-6261.2009.01479.x
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.