How Often Do Firms Really Refinance ? Evidence From Corporate Filings

Refinancing events are frequently used by capital structure researchers to study corporate financial decisions. This paper explores the nature of corporate refinancings by investigating corporate filings in detail. A number of facts emerge from our analysis, some surprising and some expected. Many refinancings identified by looking at leverage changes reported in Compustat are not really refinancings and may reduce the power of existing empirical papers. A subset of firms refinance very frequently (some more than twice a year), while most levered firms either never refinance or do so only rarely. The major cause of many refinancings is operating needs (either due to the need to cover cash shortage in distress or seasonal requirements) rather than long-term capital structure or investment policies. These and many other facts suggest that capital structure empirical research methods as well as many existing empirical results need to be reconsidered. ∗We thank Dasha Anosova for excellent research assistance. Firms’ security issuance and repurchase decisions are a rich source of information about modern theories of capital structure. The trade-off theory of capital structure with adjustment costs (e.g. Fisher, Heinkel and Zechner 1989; Strebulaev 2007) predicts that firms refinance infrequently, and only when the cost of deviating from target leverage eclipses the costs of adjusting capital structure. When firms do interact with the financial markets, their actions move leverage towards a target. Dynamic models of capital structure based on Tobin’s Q theory of investment (e.g. Hennessy and Whited 2005, 2007) predict that firms optimally raise external finance to fund investment opportunities. In the presence of fixed costs to raising external finance, firms tap the markets only infrequently, and hoard cash to fund investment needs (Nikolov and Whited 2013; Eisfeldt and Muir 2013). Theories of market timing (e.g. Baker and Wurgler 2002) predict that firms issue overpriced securities and repurchase underpriced ones. Empirical capital structure research has increasingly used capital structure events, such as substantial leverage changes, to study corporate financial decisions. A typical approach is to define a refinancing that materially affects the capital structure of the company. A frequently used definition applied to the Compustat data on U.S. firms is 2 to identify refinancing years or quarters as those periods where (net) leverage increased or decreased by more than k% of book assets. Often the benchmark value of k is set ad hoc at 5% (e.g. Hovakimian, Opler and Titman 2001; Hovakimian 2004; Hovakimian, Hovakimian and Tehranian 2004; Leary and Roberts 2005). The idea behind using refinancing events is to lessen the impact of path dependency and to study corporate decisions at the time they are made or at least implemented, because refinancings give managers an opportunity to adjust their financial policies and get the firm closer to its target leverage ratio. There is substantial disagreement in the literature about the interpretation of the evidence on refinancings. Some researchers claim that firms appear to refinance very frequently (Welch 2013), while others suggest that existing data point to the relatively low frequency of refinancings (Strebulaev and Whited 2013). A major challenge with the traditional definition of refinancing in Compustat is that it is inherently noisy. Rather than observing refinancing activity directly, it bases inference on leverage changes, which can result from a number of actions, or lack thereof, by the firm. In this paper, we investigate the nature of corporate refinancings by analyzing corporate filings in fine detail. We are interested in a number of questions that can shed 3 light on existing empirical results and the determinants of corporate financial decisions. Do leverage-changing events as defined by Compustat really constitute refinancings as would be generally agreed by financial economists? Is there substantial heterogeneity in the frequency at which firms refinance? Do firms refinance for investment or pure financial reasons? How do they structure their refinancings? Do firms that refinance frequently behave differently from those that refinance rarely? Can a deeper analysis of corporate filings reconcile conflicting interpretations of the refinancing data? Our empirical analysis provides a number of surprising findings on all the questions above. We show that there is considerable heterogeneity in the frequency at which firms refinance. Based on Compustat data between 1995 and 2009, a subset of firms appears to refinance very frequently, as measured by the traditional measure of refinancing used in the literature (e.g. Hovakimian, Opler and Titman 2001; Hovakimian 2004; Hovakimian, Hovakimian and Tehranian 2004; Leary and Roberts 2005). The top 10% of the most frequently refinancing firms account for more than 20% of refinancings observed in our sample period, so the influence of these firms is overweighted in previous studies that use this measure of refinancing. In fact, we find that the 180 firms that constitute the top decile of refinancing 4 frequency materially change leverage through issuances and repurchases more than twice a year on average. This remarkably high frequency of refinancing is difficult to reconcile with theories of capital structure. To warrant such intense refinancing activity, either adjustment costs for these firms must be extremely low (e.g. there are no fixed costs to external finance) or the financing and investment opportunity sets of these firms must change very frequently. At the opposite end of the refinancing spectrum, 17% of firms do not refinance at all during our sample period, despite being present in the sample for 13.8 quarters on average. Moreover, of the firms that refinanced at least once, the least active decile shows periods of inactivity lasting almost five years on average. We find that firms on both ends of the refinancing spectrum differ systematically in their characteristics. The most frequent refinancers are younger, tend to be more highly levered, pay lower dividends, and have lower profitability and cash levels but higher market-to-book ratios and capital expenditures compared to the least active firms. To dig deeper into the reasons for refinancing, we hand-collect detailed data from There are 372 firms that never refinance, which make up 5,134 firm-quarter observations in our sample. Sample entry and exit is driven by data requirements detailed in Section I.