Leverage Dynamics under Segmented Equity and Debt Markets

35 Pages Posted: 28 Feb 2020 Last revised: 14 Mar 2020

See all articles by Hae Won (Henny) Jung

Hae Won (Henny) Jung

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Jin Yu

Monash University -Department of Banking and Finance

Qi Zeng

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: January 31, 2020

Abstract

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

Jung, Hae Won (Henny) and Yu, Jin and Zeng, Qi, Leverage Dynamics under Segmented Equity and Debt Markets (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3528729 or http://dx.doi.org/10.2139/ssrn.3528729

Hae Won (Henny) Jung

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 8641 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jin Yu (Contact Author)

Monash University -Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034590 (Phone)

HOME PAGE: http://sites.google.com/site/jinyufinecon/

Qi Zeng

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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