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Leverage Dynamics Over the Business Cycle

Michael Halling

Swedish House of Finance

Jin Yu

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Josef Zechner

Vienna University of Economics and Business

October 9, 2015

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, for the average and the median firm, 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. 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: 52

Keywords: Empirical Corporate Finance, Capital Structure Dynamics, Business Cycle Variation

JEL Classification: G32, G15

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Date posted: February 15, 2011 ; Last revised: October 10, 2015

Suggested Citation

Halling, Michael and Yu, Jin and Zechner, Josef, Leverage Dynamics Over the Business Cycle (October 9, 2015). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1762289 or http://dx.doi.org/10.2139/ssrn.1762289

Contact Information

Michael Halling
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm

Jin Yu
UNSW Australia Business School, School of Banking and Finance ( email )
Sydney, NSW 2052

Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia 4071 Brisbane
HOME PAGE: http://www.firn.org.au

Josef Zechner (Contact Author)
Vienna University of Economics and Business ( email )
Heiligenstaedter Strasse 46
Vienna, Wien A-1019
Feedback to SSRN

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