Corporate Leverage and the Dynamics of its Components

Journal of Financial and Quantitative Analysis (Forthcoming)

Posted: 6 Nov 2019

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Gayané Hovakimian

Fordham University, Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2019

Abstract

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas the time series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered 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.

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 (October 25, 2019). Journal of Financial and Quantitative Analysis (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3475780

Armen Hovakimian (Contact Author)

Baruch College - Zicklin School of Business ( email )

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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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