Corporate Leverage and the Dynamics of Its Components
57 Pages Posted: 8 May 2019 Last revised: 24 May 2019
Date Written: April 20, 2019
We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in observed leverage ratios is driven by highly persistent targets, whereas the time series variation is driven by transitory deviations from targets. Deviations are less persistent for firms that are overlevered and firms that are smaller, younger, focused, or have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms. Thus, consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are likely to be lower and when the costs of adjustment are likely to be higher.
Keywords: corporate financing, capital structure, leverage, target leverage, persistence
JEL Classification: G30, G32
Suggested Citation: Suggested Citation