Target behavior and financing : how conclusive is the evidence?

Chang, Xin and Dasgupta, Sudipto (2009) Target behavior and financing : how conclusive is the evidence? Journal of Finance, 64 (4). pp. 1767-1796. ISSN 0022-1082

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.