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... interest between insiders (managers, holders of existing loans, bonds or shares) and outsiders (investors, banks, etc.) No optimal level of leverage exists according to this second theory. Our discussion in Section 1, showing that companies rely mostly on internal funds, could support the “pecking order” theory too. This ambiguity is now widely recognized in the literature. While a large number of studies has developed and applied empirical methodologies to tests the implications of both theories, the consensus is that tests of either hypothesis in general lack power against the alternative. Shyam-Sunder and Myers (1999) and Chirinko and Singha (1999) provide a state of the art discussion of the issue. Rather than entering the debate, we choose to take an eclectic approach and include elements from both theories in our model of debt issues. Determinants of debt issues Several determinants of leverage have been investigated in the empirical literature. Harris and Raviv (1991) present a comprehensive survey of the results: “… studies generally agree that leverage increases with fixed assets, non-debt tax shields, growth opportunities, and firm size and decreases with volatility, advertising expenditures, resear...

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... its three components Earnings (before amortization and depreciation), interest and taxes so that one could use the three separately as explanatory variables in the econometric model. This would allow testing the separate effects of such components. However, insufficient availability of data on interest and tax payments prevents us from exploiting this approach. The fifth and final explanatory variable is the “current ratio”, that is, the ratio between current assets and current liabilities (Curr). One reason why this variable may be important is that it is a proxy for liquidity. According to Ozkan (2001), firms with higher liquidity can support a relatively higher leverage as lenders have greater reassurance that obligations will be met when they fall due. This will imply a positive relation between issues of debt and the current ratio. Another reason for a positive sign, relevant in our set6 Note the difference between the argument given above to include lagged leverage under the pecking order theory (i.e. sustained low profitability implies both high leverage and high issue) and the argument given here (i.e. uncharacteristically low profitability in a given period forces the firm to issue a...

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...ssets, non-debt tax shields, growth opportunities, and firm size and decreases with volatility, advertising expenditures, research and development expenditures, bankruptcy probability, profitability and uniqueness of the product”. The survey in Harris and Raviv (1991) has been the starting point for most recent studies. Rajan and Zingales (1995) and more recently the papers in Sauvé and Scheuer (1999) provide a thorough discussion of recent developments. Among these, a most notable development has been the estimation of dynamic leverage functions, which include lagged leverage as a regressor. Kremp and Stöss (2001) estimate dynamic leverage models for France and Germany while Ozkam (2001) studies UK companies. Drawing on this literature, we select five main determinants of debt issues. Firstly, gross debt issues should depend positively on the lagged level of leverage (Lev). Both the “trade-off” and the “pecking order” theory are consistent with a positive relationship. If the former theory applies, we can assume that companies with observed high levels of leverage also have high unobservable leverage targets. They will issue new debt in order to remain close to their target as existing debt expires. If...