Net Debt and Equity Issuing Activity

The first row of Table 21.6 shows that CFOs were by no means inactive in the capital markets. If you had perfectly known how firms had issued and retired debt and equity and paid in and paid out funds, you could have explained 69% of firms' total capital structure changes over a five-year horizon. The remaining 31% are necessarily corporate value changes that have not been directly influenced by managerial issuing and repurchasing. Omitting dividends drops the explanatory power from 69% to 66%, so dividends can explain only a meager 3% of capital structure—as far as debt-equity ratio dynamics in publicly traded corporations are concerned, dividends are a sideshow.

Net Debt Issuing.

Net Debt Issuing: Row 2 in Table 21.6 tells you that 40% of all capital structure changes over five years were due to firms' net debt issuing activity. The next three rows tell you that long-term debt alone can account for 32% of changes in debt-equity ratios, that short-term debt has been somewhat less important, and that convertible debt has been fairly unimportant. It would be interesting to break these debt issuing activities into their components-issuing and repurchasing—and to break the repurchasing in turn into sinking fund payments, interest payments, and principal repayments, so that we could understand better what part of the mechanism really drives capital structure. Remarkably, despite the obvious importance of debt issuing activity, we really do not know this decomposition.

Net and Pure Equity Issuing: The next row in Table 21.6 shows that net equity issuing can Net Equity Issuing. explain about 16% of changes in firms' debt-equity ratio, and therefore is less important than net debt issuing as a determinant of capital structure. Nevertheless, equity issues are more glamorous, so economists have studied them in more detail.

Table 21.7: Typical Equity Share Activity Among S&P100 Stocks, 1999-2001

Total Seasoned Equity Offering Activity

Executive Compensation

Convertible Debt

Warrant Exercise

Share Repurchases

Changes in Equity Outstanding

Note: Categories describe equity issued in conjunction with an activity. Equity share activity is measured per annum and as a fraction of total assets. For scale, changes in total liabilities were about 10.07% of assets, and changes in retained earnings were 1.37% of assets. Source: Fama and French, 2004.

Table 21.7 decomposes equity issuing (this time, not net of equity repurchasing) into its Net Equity Issuing.

components, though only for the very large S&P 100 firms. (Unfortunately, we do not have knowledge of a similar decomposition for smaller firms.) The table dispels one popular myth that most shares occur through plain seasoned equity offerings. Instead, from 1999 to 2001, equity shares appeared most commonly through equity offerings in connection with corporate acquisitions. (We also know that firms commonly issue not only equity but also debt to finance acquisitions, so we cannot conclude that firms' debt-equity ratios declines during acquisitions.) Outside an acquisition, seasoned equity offerings are exceedingly rare. We also saw these patterns in IBM's case in Section 16-4—IBM did not issue equity, repurchased some shares into its treasury, and then used equity shares from its treasury in its acquisition of PwCC partners and in its funding of employee stock option plans.

Moreover, other evidence similarly suggests that, even including M&A activity, public equity offerings are rare. The 10,000 or so firms trading on the NYSE and NASDAQ conducted only about 12,000 equity offerings from 1990 to 2000, of which about half were initial public offerings and about half were seasoned equity offerings. With only 300 SEOs in an average year, you can work out that a typical publicly traded firm would have issued equity only about once every 20 years.

More evidence from elsewhere suggests SEOs are rare in smaller firms, too.

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