When firms adjust their capital structures, they tend
to move toward a target debt ratio that is
consistent with theories based on tradeoffs between
the costs and benefits of debt. In contrast to
previous empirical work, out tests explicitly
account for the fact that firms may face impediments
to movements toward their target ratio, and that the
target ratio may change over time as the firm's
profitability and stock price change. A separate
analysis of the size of the issue and repurchase
transactions suggests that the deviation between the
actual and the target ratios plays a more important
role in the repurchase decision than in the issuance
decision.