Refinancing, Profitability, and Capital Structure

52 Pages Posted: 4 Nov 2012 Last revised: 26 Oct 2015

See all articles by Andras Danis

Andras Danis

Georgia Institute of Technology - Scheller College of Business

Daniel A. Rettl

University of Georgia - Department of Banking and Finance

Toni M. Whited

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

Date Written: March 2, 2014

Abstract

We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other times, it is negative. These results are consistent with dynamic trade-off models in which infrequent capital structure rebalancing is optimal. The time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models. Our results are not driven by investment layouts, market timing, payout, or mechanical mean reversion of leverage.

Keywords: Dynamic Tradeoff Theory

JEL Classification: G30, G32

Suggested Citation

Danis, Andras and Rettl, Daniel A. and Whited, Toni M., Refinancing, Profitability, and Capital Structure (March 2, 2014). Available at SSRN: https://ssrn.com/abstract=2170671 or http://dx.doi.org/10.2139/ssrn.2170671

Andras Danis

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://scheller.gatech.edu/danis

Daniel A. Rettl

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Toni M. Whited (Contact Author)

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

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