Leverage Dynamics Over the Business Cycle
Swedish House of Finance
UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)
Vienna University of Economics and Business
November 18, 2014
AFA 2012 Chicago Meetings Paper
Surprisingly little is known about the business cycle dynamics of leverage. The few existing empirical studies report evidence that target leverage evolves pro-cyclically either for all firms (Korteweg and Strebulaev (2013)) or for financially constrained ones (Korajczyk and Levy (2003)). In contrast, we show that 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 (financially constrained and unconstrained firms), data samples (a quarterly, US-only and a yearly, international sample), empirical models of leverage, and definitions of leverage.
Number of Pages in PDF File: 51
Keywords: Empirical Corporate Finance, Capital Structure Dynamics, Business Cycle Variation
JEL Classification: G32, G15
Date posted: February 15, 2011 ; Last revised: November 18, 2014
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