Corporate Deleveraging and Financial Flexibility
Charles A. Dice Working Paper No. 2017-03-028
73 Pages Posted: 17 Nov 2017
Date Written: November 17, 2017
Most firms deleverage from their historical peak market-leverage (ML) ratios to near-zero ML, while also markedly increasing cash balances to high levels. Among 4,476 nonfinancial firms with five or more years of post-peak data, median ML is 0.543 at the peak and 0.026 at the later trough, with a six-year median time from peak to trough and with debt repayment and earnings retention accounting for 93.7% of the median peak-to-trough decline in ML. The findings support theories in which firms deleverage to restore ample financial flexibility and are difficult to reconcile with most firms having materially positive leverage targets.
Keywords: deleveraging, financial flexibility, capital structure, payout policy, cash balances, leverage dynamics, financial distress
JEL Classification: G31, G33, G35
Suggested Citation: Suggested Citation