Download this Paper Open PDF in Browser

Capital Structure Dynamics and Transitory Debt

61 Pages Posted: 4 Sep 2008 Last revised: 8 Sep 2010

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: September 6, 2010

Abstract

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

DeAngelo, Harry and DeAngelo, Linda and Whited, Toni M., Capital Structure Dynamics and Transitory Debt (September 6, 2010). Available at SSRN: https://ssrn.com/abstract=1262464 or http://dx.doi.org/10.2139/ssrn.1262464

Harry DeAngelo (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Linda DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-3868 (Phone)
213-740-6650 (Fax)

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
2,446
Rank
4,040
Abstract Views
8,868