Firms Capital Structure under the Akerlof s Separating Equilibrium

Abstract

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We use a sample of seven countries, for the period 2001-2006 to test the hypotheses related to the separating theorem proposed by Akerlof (1970) applied to fi rms' capital structure. We develop an empirical integrated model of capital structure that takes into account the trade-off, the pecking order and the market timing theories. We conclude that: 1. Being part of the market index is a guarantee of the quality of the fi rm which reduces the need for debt; 2. Indexed companies with growth opportunities use less debt to fi nance their investments to avoid debt overhang; 3. Non-indexed fi rms with a defi cit of funds for fi nancing their investments face higher fi nancialconstraints than indexed fi rms with a defi cit of funds in particular in bearish markets, and 4. The capital structure of non-indexed fi rms is more infl uenced by market timing than the capital structure of indexed fi rms.