61 Pages Posted: 15 Feb 2011 Last revised: 24 Nov 2015
Date Written: November 21, 2015
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: 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
By John Graham