Financing Major Investments: Information about Capital Structure Decisions

We study how 1,455 firms paid for 2,027 very large investments during the period 1989-2005. Compustat Flow of Funds data indicate that major investments are mostly externally financed. An initial reliance on heavy debt financing is reversed following the event year, as firms adjust toward target leverage ratios. Small firms issue a surprisingly large amount of equity in this process. Pecking order and market timing effects appear during the event year, but weaken in the course of completing the financing process.