The Journal of Finance

Target Behavior and Financing: How Conclusive Is the Evidence?

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01479.x

XIN CHANG, SUDIPTO DASGUPTA

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.

Financial Constraints, Competition, and Hedging in Industry Equilibrium

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01280.x

TIM ADAM, SUDIPTO DASGUPTA, SHERIDAN TITMAN

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.

Buyer–Supplier Relationships and the Stakeholder Theory of Capital Structure

Published: 09/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01403.x

SHANTANU BANERJEE, SUDIPTO DASGUPTA, YUNGSAN KIM

Firms in bilateral relationships are likely to produce or procure unique products—especially when they are in durable goods industries. Consistent with the arguments of Titman and Titman and Wessels, such firms are likely to maintain lower leverage. We compile a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat and find results consistent with the predictions of this theory.

Analyst Coverage and Financing Decisions

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01010.x

XIN CHANG, SUDIPTO DASGUPTA, GILLES HILARY

We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002)“external finance‐weighted” average market‐to‐book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.