Capital Structure Dynamics and Transitory Debt
61 Pages Posted: 4 Sep 2008 Last revised: 8 Sep 2010
Date Written: September 6, 2010
Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic capital structure model with these features and find that it replicates industry leverage very well, explains debt issuances/repayments better than extant tradeoff models, and accounts for the leverage changes accompanying investment "spikes." It generates leverage ratios with slow average speeds of adjustment to target, which are dampened by intentional temporary movements away from target, not debt issuance costs.
Keywords: capital structure, leverage dynamics, target leverage, transitory debt, financial flexibility
JEL Classification: G32, G31, D21, D92, E22, H25
Suggested Citation: Suggested Citation