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Leverage Dynamics over the Business Cycle

61 Pages Posted: 15 Feb 2011 Last revised: 24 Nov 2015

Michael Halling

Stockholm School of Economics & Swedish House of Finance

Jin Yu

Monash University -Department of Banking and Finance

Josef Zechner

Vienna University of Economics and Business

Date Written: November 21, 2015

Abstract

Surprisingly little is known about the business cycle dynamics of leverage. The existing evidence documents that target leverage evolves pro-cyclically either for all firms or financially constrained ones. In contrast, we show that, on average, target leverage ratios evolve counter-cyclically once cyclicality is measured comprehensively, accounting for variation in explanatory variables and model parameters. These counter-cyclical dynamics are robust to different subsamples of firms, data samples, empirical models of leverage, and definitions of leverage. There is a fraction of 10 to 25% of firms with pro-cyclical dynamics whose characteristics are consistent with counter-cyclical dynamics for loss-given-default and probability of default.

Keywords: Empirical Corporate Finance, Capital Structure Dynamics, Business Cycle Variation

JEL Classification: G32, G15

Suggested Citation

Halling, Michael and Yu, Jin and Zechner, Josef, Leverage Dynamics over the Business Cycle (November 21, 2015). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1762289 or http://dx.doi.org/10.2139/ssrn.1762289

Michael Halling

Stockholm School of Economics & Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Jin Yu

Monash University -Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034590 (Phone)

HOME PAGE: http://sites.google.com/site/jinyufinecon/

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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