Three essays on credit constraints and capital structure

The first essay, Debt Capacity Constraints, Information, and the Pecking Order Model of Capital Structure , investigates why the pecking order model does not appear to describe the financing choices of small and growth firms. The pecking order model predicts debt issues only when a firm has the capacity to absorb new debt and when firm value is relatively predictable. By explicitly controlling for asymmetric information about firm risk, empirical tests support the predictions of the pecking order model for small and growth firms.;The second essay, The Sensitivity of Investment to Internal Funds When the Costs of External Funds Differ , asks whether the observed investment-cash flow sensitivity of financially constrained firms can be explained by relatively high security issue costs. Security issue costs are indicative of credit constraints. The empirical tests suggest that only cash is relatively more important to investment spending for high issue cost firms, but not because of the need for cash to fund planned investment. Cash serves as an indicator of growth opportunities not captured by empirical approximations of Tobin\u27s Q. Further tests demonstrate that commonly used methods to identify financially constrained firms mimic relatively high security issue costs.;The third essay, The Effect of Competitive Structure on the Relationship between Leverage and Profitability , attempts to explain why firms in concentrated industries have different responses of leverage ratios to current profitability. The leverage-profitability relationship is important to distinguishing between the pecking order and trade-off theories of capital structure. The essay examines whether the speed of reversion in profitability affects the leverage-profitability relationship. When U.S. Census data are used to measure industry concentration, the empirical results support the prediction that differences in the leverage-profitability relationship between competitive and concentrated industries is related to differences in the speed of reversion in profitability