Does tradeoff theory explain high-frequency debt issuers?

Abstract

Over the past forty years, one-third of the publicly listed industrial firms in the U.S. raised two- thirds of all public and private debts (net of debt rollovers). We use these high-frequency debt issuers (HFIs) - large and highly leveraged, investment-intensive firms with low Tobin's Q - to test tradeoff theory of -debt financing. Relative to low-frequency net-debt issuers (LFIs) - small, low-leveraged, R&D-intensive firms with high Q - HFIs appear to face low total and fixed issue costs. Under dynamic tradeoff theory, HFIs should therefore exhibit smaller issue sizes, lower leverage ratio volatility, and higher speed-of-adjustment to deviations from target leverage ratios than LFIs, which our evidence fails to support. However, consistent with dynamic financing and investment models, over-leveraged firms occasionally issue debt followed by equity issues and leverage ratio reductions. Finally, we show that CEO equity ownership and stock-based compensation are both higher for HFIs than for other sample firms.