Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers

56 Pages Posted: 17 Mar 2013 Last revised: 19 Jun 2020

See all articles by B. Espen Eckbo

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Michael Kisser

BI Norwegian Business School

Date Written: June 19, 2020

Abstract

We test whether high-frequency net-debt issuers (HFIs) - public industrial companies with relatively low issuance costs and high debt-financing benefits - manage leverage towards long-run targets. Our answer is they do not: (1) the leverage-profitability correlation is negative even in quarters with leverage rebalancings, (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers, and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic tradeoff theory, the theory does not appear to hold.

Keywords: High-frequency debt issuer, issue costs and benefits, dynamic rebalancing, leverage profitability relation, speed of adjustment, tradeoff theory

JEL Classification: G32

Suggested Citation

Eckbo, B. Espen and Kisser, Michael, Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers (June 19, 2020). Review of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=2234435 or http://dx.doi.org/10.2139/ssrn.2234435

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael Kisser

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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