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Leverage Dynamics Over the Business CycleMichael HallingStockholm School of Economics - Department of Finance; University of Utah Jin YuUniversity of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN) Josef ZechnerVienna University of Economics and Business Administration October 24, 2012 AFA 2012 Chicago Meetings Paper Abstract: This paper analyzes the business cycle dynamics of leverage using a comprehensive, international sample. For the full sample, target leverage ratios increase and speeds of adjustment towards the target decrease during recessions. These effects vary substantially across institutional settings. Firms in common law countries and with relatively high debtholder protection exhibit decreasing target leverage and a much smaller drop in the speed of adjustment in recessions. Leverage dynamics are largely not caused by changing firm characteristics but by their changing effects on firm policies. The results document that both demand and supply effects are important for capital structure.
Number of Pages in PDF File: 60 Keywords: Empirical Corporate Finance, Capital Structure Dynamics, Business Cycle Variation JEL Classification: G32, G15 working papers seriesDate posted: February 15, 2011 ; Last revised: October 24, 2012Suggested CitationContact Information
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