Leverage Dynamics over the Business Cycle
Swedish House of Finance
UNSW Australia Business School, School of Banking and Finance
Vienna University of Economics and Business
November 21, 2015
AFA 2012 Chicago Meetings Paper
Surprisingly little is known about the business cycle dynamics of leverage. The existing evidence documents that target leverage evolves pro-cyclically either for all firms or financially constrained ones. In contrast, we show that, on average, target leverage ratios evolve counter-cyclically once cyclicality is measured comprehensively, accounting for variation in explanatory variables and model parameters. These counter-cyclical dynamics are robust to different subsamples of firms, data samples, empirical models of leverage, and definitions of leverage. There is a fraction of 10 to 25% of firms with pro-cyclical dynamics whose characteristics are consistent with counter-cyclical dynamics for loss-given-default and probability of default.
Number of Pages in PDF File: 61
Keywords: Empirical Corporate Finance, Capital Structure Dynamics, Business Cycle Variation
JEL Classification: G32, G15
Date posted: February 15, 2011 ; Last revised: November 24, 2015
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