Managers Have Capital Structure Targets? Essay

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This differs from the more static view taken by Mehrotra. There are a couple of reasons for this key difference. One is that Mehrotra only studied spinoff firms. These firms are easier to study because the managers must choose a capital structure for the new firm. However, this makes for an imperfect survey.

Barclay on the other hand has studied a much broader basket of companies. This forced the use of proxies, but it also provided a more accurate view of corporate behavior with respect to capital structure on a day-to-day basis, rather than simply on a special event basis. The more credible paper of the two in addressing the rationale behind capital structure is that of Barclay.

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Both papers used empirical tests, but the methodology behind the Barclay paper was more broad-based, meaning that it can be applied outside of the specific spinoff situation. Barclay has made some determinations about management's approach to capital structure that provide insight at all times of operation. While it is important that we understand how such decisions are driven under ideal circumstances, it is more important to know how these decisions are being made under all circumstances. The tests run by Mehrotra are strong,….....

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