Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers
56 Pages Posted: 17 Mar 2013 Last revised: 19 Jun 2020
Date Written: June 19, 2020
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: Suggested Citation