Corporate Deleveraging and Financial Flexibility

Fisher College of Business Working Paper No. 2017-03-028

Charles A. Dice Working Paper No. 2017-03-028

73 Pages Posted: 17 Nov 2017  

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Andrei Gonçalves

Ohio State University (OSU), Fisher College of Business, Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: November 17, 2017

Abstract

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

DeAngelo, Harry and Gonçalves, Andrei and Stulz, René M., Corporate Deleveraging and Financial Flexibility (November 17, 2017). Fisher College of Business Working Paper No. 2017-03-028. Available at SSRN: https://ssrn.com/abstract=3069653 or http://dx.doi.org/10.2139/ssrn.3069653

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6541 (Phone)
213-740-6650 (Fax)

Andrei Gonçalves

Ohio State University (OSU), Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH
United States

HOME PAGE: http://fisher.osu.edu/academic-departments/department-finance

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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