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0:00
My name is Vidhan Goyal,
I am a Professor of Finance,
at the Hong Kong University
of Science and Technology.
And today, I will be talking about
"Traditional Theories
of Capital Structure:
Trade-off versus Pecking Order".
0:13
This talk looks at, how firms make
their financing decisions?
How do they choose
their capital structures?
How do they decide
between the mix of financing?
How much debt
and how much equity to have?
And the deeper question
that we are asking here is,
why have firms got into where they are?
Whether firms did so
because they wanted to save on taxes,
avoid showing equity,
retain financial flexibility,
time the market, etc.
So really what we are interested
in learning is,
why do firms make those choices
that they do make?
What's driving
their financing decisions?
0:48
Let me show you some data.
Here is a plot of how leverage looks
for US firms over a long period of time.
So what we are plotting here is
the ratio of debt over debt plus equity
for US firms over the 1971-2013 period.
Now one thing you would notice
from the plot is that
the average leverage of US firms
appears fairly stationary.
The average is about 36%.
It doesn't explode,
it doesn't go down a lot,
it doesn't go up a lot.
It stays around close to 35%-36%
and that's the average for US firms.
The median firm has about 30% debt,
70% equity so they are roughly...
you know, using one-third debt financing
to finance their assets,
and two-thirds equity.
So in general, leverage appears
to be fairly conservative,
roughly two out of every five firms
have an average debt
to capital ratio of less than 20%.
So a lot of US firms appear to be...
what some people would say under levered
or have little debt
and a lot of equity.
But in general, firms do use some debt.
Most typical firms use a lot of debt,
but not nearly enough.
