Simulation experiments show that both partial-adjustment and debt-equity choice models can generate spuriously significant estimates that are consistent with the hypothesis that firms have target debt ratios to which they periodically adjust. Regressions relying on full-sample fixed effects models of target leverage, in particular, produce results severely biased in favor of the target-adjustment hypothesis. Various target proxies and modifications to the standard methodologies are examined to identify partial-adjustment and debt-equity choice models that have power to reject the target-adjustment hypothesis. The resulting estimates of the speed of adjustment are in the range of five-eight percent per year.

Pecking order and market timing theories assume that corporate financing decisions are made in the interests of existing shareholders. We find that existing institutional investors, on average, significantly increase their share ownership at the time of the SEO, including SEOs that would be classified as overpriced based on ex-ante measures of mispricing, such as pre-issue returns and market-to-book ratios. We further find that higher pre-existing institutional shareholdings lead to less SEO timing. Overall, the results question whether firms engage in equity timing to benefit existing shareholders at the expense of investors buying shares in the SEOs.