Uncertainty, Investment Spikes, and Corporate Leverage Adjustments

53 Pages Posted: 15 Feb 2016 Last revised: 21 Aug 2023

See all articles by Hyun Joong Im

Hyun Joong Im

The University of Seoul

Robert W. Faff

University of Queensland; Bond University

Chang Y. Ha

Peking University - HSBC School of Business; Columbia University - Columbia Business School

Date Written: July 4, 2022

Abstract

We study the joint effects of uncertainty and investment spikes on corporate leverage adjustments. In our baseline finding we show that, while uncertainty has a nontrivial adjustment speed effect for overlevered firms, underlevered firms are not greatly impacted. In our second baseline finding, we document asymmetric effects of investment spikes on the adjustment speed between overlevered and underlevered firms. Specifically, during the investment-spike period, underlevered firms adjust their leverage very promptly, whereas overlevered firms tend to adjust their leverage much more slowly. Bringing these two baseline analyses together in a combined analysis, conditional on the level of uncertainty, the investment regime has asymmetric effects between overlevered and underlevered firms. Specifically, when uncertainty is fixed, regardless of whether uncertainty is high or low, overlevered firms facing investment spikes tend to adjust their leverage slower than their non-spike counterparts, but underlevered firms facing investment spikes tend to adjust their leverage substantially faster than their non-spike counterparts. Further, we find that elevated uncertainty uniformly increases the speed of adjustment for overlevered firms without investment spikes, but the influence for underlevered firms without investment spikes is much less evident.

Keywords: Capital Structure, Uncertainty, Investment Spikes, Adjustment Speeds

JEL Classification: G31, G32, G33, D22, D81, D92

Suggested Citation

Im, Hyun Joong and Faff, Robert W. and Ha, Chang Y., Uncertainty, Investment Spikes, and Corporate Leverage Adjustments (July 4, 2022). Journal of Banking and Finance, Vol. 145, 106649, 2022, Available at SSRN: https://ssrn.com/abstract=2732554 or http://dx.doi.org/10.2139/ssrn.2732554

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

163 Seoulsiripdae-ro
Dongdaemun-gu
Seoul, 02504
Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Bond University ( email )

Gold Coast, QLD 4229
Australia

Chang Y. Ha

Peking University - HSBC School of Business ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China
+8675526033651 (Phone)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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