Leverage Dynamics under Segmented Equity and Debt Markets
35 Pages Posted: 28 Feb 2020 Last revised: 14 Mar 2020
Date Written: January 31, 2020
We study a continuous-time dynamic capital structure model in which a firm can continuously adjust its capital structure. Unlike previous models, we assume heterogeneous equity and debt holders and segmented equity and debt markets. We show that the expected future equity and debt market returns, but not realized market returns, affect the firm's debt issuance policy and speed of leverage adjustment. The effect is stronger for firms with larger asset beta. We empirically test and confirm our model predictions.
Keywords: Dynamic Capital Structure, Speed of Adjustment, Capital Market Segmentation
JEL Classification: G32, G12
Suggested Citation: Suggested Citation