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Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers

58 Pages Posted: 17 Mar 2013 Last revised: 12 Oct 2017

B. Espen Eckbo

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

Michael Kisser

Norwegian School of Economics (NHH)

Date Written: October 12, 2017

Abstract

We examine the lifecycle leverage dynamics of persistent debt issuers (net of debt retirements). We show that these public industrial firms raised the bulk of the aggregate public and private corporate debts issued in the US over the past three decades. In apparent contradiction of tradeoff theory, the cross-sectional leverage-profitability correlation is non-positive at recapitalization points. Moreover, the speed-of-adjustment to target leverage deviations are no higher than for low-frequency debt issuers, of which forty percent are all-equity firms. While there is some evidence that firms eliminate excess leverage in periods with low investment activity, financing investments with debt appears to take priority over managing towards a leverage target.

Keywords: Capital structure, external finance, debt issues, equity issues, issue costs, leverage, cash-flow identity

JEL Classification: G32

Suggested Citation

Eckbo, B. Espen and Kisser, Michael, Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers (October 12, 2017). Tuck School of Business Working Paper No. 2234435. 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 ECARES ULB CP 114
B-1050 Brussels
Belgium

Michael Kisser

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

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