Abstract

http://ssrn.com/abstract=2004753
 
 

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What Do Credit Markets Tell Us About the Speed of Adjustment?


Redouane Elkamhi


University of Iowa - Henry B. Tippie College of Business

Raunaq S. Pungaliya


Sungkyunkwan University (SKK) Graduate School of Business

Anand M. Vijh


University of Iowa - Department of Finance

January 2013


Abstract:     
This article proposes a methodology to infer investors’ expectations about the speed at which firms adjust to their target leverage. We find that in the long run bond and CDS investors expect leverage to converge towards a target as suggested by the tradeoff theory. On average, the credit markets imply a fairly rapid annual speed of adjustment of 26%. However, we also find strong support that in the short run the expected adjustment process implicit in the prices of credit instruments is affected by transaction costs, pecking order, and market timing. Overall, we show that one can learn about capital structure speed of adjustment not just from realized leverage changes, but also from expectations embedded in market prices.

Number of Pages in PDF File: 47

Keywords: Target leverage, tradeoff theory, speed of adjustment, pecking order, market timing, bond pricing

JEL Classification: G32, G12

working papers series


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Date posted: February 15, 2012 ; Last revised: January 22, 2013

Suggested Citation

Elkamhi, Redouane and Pungaliya, Raunaq S. and Vijh, Anand M., What Do Credit Markets Tell Us About the Speed of Adjustment? (January 2013). Available at SSRN: http://ssrn.com/abstract=2004753 or http://dx.doi.org/10.2139/ssrn.2004753

Contact Information

Redouane Elkamhi
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
Raunaq S. Pungaliya
Sungkyunkwan University (SKK) Graduate School of Business ( email )
53 Myeongnyun-dong 3-ga Jongno-ju
Seoul, 110-745
Korea
Anand M. Vijh (Contact Author)
University of Iowa - Department of Finance ( email )
Iowa City, IA 52242-1000
United States
319-335-0921 (Phone)
319-335-3609 (Fax)
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