Corporate Leverage and the Dynamics of Its Components

57 Pages Posted: 8 May 2019 Last revised: 24 May 2019

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Gayané Hovakimian

Fordham University, Gabelli School of Business

Date Written: April 20, 2019

Abstract

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

Hovakimian, Armen and Hovakimian, Gayané, Corporate Leverage and the Dynamics of Its Components (April 20, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-05-02. Available at SSRN: https://ssrn.com/abstract=3376773 or http://dx.doi.org/10.2139/ssrn.3376773

Armen Hovakimian (Contact Author)

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Gayané Hovakimian

Fordham University, Gabelli School of Business ( email )

Joseph A. Martino Hall
45 Columbus Ave
New York, NY 10023
United States
212-636-7021 (Phone)

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