Leverage and Capital Utilization

30 Pages Posted: 19 Dec 2018 Last revised: 27 Aug 2019

See all articles by Diogo Duarte

Diogo Duarte

Florida International University

Hamilton Galindo Gil

Cleveland State University; Cleveland State University

Alexis Montecinos

Sawyer Business School - Suffolk University; Universidad Adolfo Ibáñez - Business School

Date Written: January 25, 2019

Abstract

Our paper documents procyclical behavior between capital utilization and short-term debt. This strong positive relationship persists even when we control the regressions for firm size, profits, and growth, attesting to the robustness of our findings. In addition, our analysis of the time series and panel data shows that the relationship is present at both the aggregate and firm levels. Based on this empirical finding, we develop a DSGE model that sheds light on the role of capital utilization in propagating real and financial shocks to financial assets. We show that in the presence of capital utilization, positive real and financial shocks cause the firm to change its financing of the equity payout policy from earnings to debt, resulting in an increase in short-term debt. Therefore, ignoring the firm's optimal decision on capital utilization may lead to misleading conclusions on how leverage is undertaken.

Keywords: Leverage, Capital utilization, Short-term debt, DSGE model, Enforcement constraint, Endogenous depreciation

JEL Classification: E22, E23, E32, G32, G35

Suggested Citation

Duarte, Diogo and Galindo Gil, Hamilton and Montecinos, Alexis, Leverage and Capital Utilization (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=3293949 or http://dx.doi.org/10.2139/ssrn.3293949

Diogo Duarte (Contact Author)

Florida International University ( email )

11200 S.W. 8th St., 236
Miami, FL 33199
United States

Hamilton Galindo Gil

Cleveland State University ( email )

Cleveland, OH 44115
United States

HOME PAGE: http://https://academic.csuohio.edu/galindogil-hamilton/

Cleveland State University ( email )

Cleveland, OH 44107
United States

HOME PAGE: http://https://academic.csuohio.edu/galindogil-hamilton/

Alexis Montecinos

Sawyer Business School - Suffolk University ( email )

Boston, MA 02108
United States

Universidad Adolfo Ibáñez - Business School ( email )

Santiago
Chile

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