Leverage Dynamics Over the Business Cycle
Swedish House of Finance; University of Utah
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
Vienna University of Economics and Business
October 24, 2012
AFA 2012 Chicago Meetings Paper
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, G15working papers series
Date posted: February 15, 2011 ; Last revised: October 24, 2012
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