The Choice Between Equity and Debt: An Empirical Study



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    • London Business School, London. I would like to thank Professor Richard Brealey, Dr. Ian Cooper, and participants at the London Business School Finance Workshop for their very useful comments and suggestions.


This empirical study of security issues by UK companies between 1959 and 1974 focuses on how companies select between financing instruments at a given point in time. It throws light on a number of interesting questions. First, it demonstrates that companies are heavily influenced by market conditions and the past history of security prices in choosing between debt and equity. Second, it provides evidence that companies appear to make their choice of financing instrument as if they have target levels of debt in mind. Finally, the results are consistent with the notion that these target debt levels are themselves a function of company size, bankruptcy risk, and asset composition.