The role of target leverage in security issues and repurchases

The paper examines whether security issues and repurchases adjust the capital structure toward the target. The time-series patterns of debt ratios imply that only debt reductions are initiated to offset the accumulated deviation from target leverage. The importance of target leverage in earlier debt-equity choice studies is driven by the subsample of equity issues accompanied by debt reductions. Unlike debt issues and reductions, equity issues and repurchases have no significant lasting effect on capital structure. Therefore, even firms that have target debt ratios can engage in timing the equity market.