Cash Flows and Leverage Adjustments
40 Pages Posted: 21 Mar 2007 Last revised: 7 Nov 2013
Date Written: May 31, 2011
Recent research has emphasized the impact of transaction costs on firm leverage adjustments. We recognize that cashflow realizations can provide opportunities to adjust leverage at relatively low marginal cost. We find that a firm's cashflow features affect not only the leverage target, but also the speed of adjustment toward that target. Heterogeneity in adjustment speeds is driven by an economically meaningful concept: adjustment costs. Accounting for this fact produces adjustment speeds that are significantly faster than previously estimated in the literature. We also analyze how both financial constraints and market timing variables affect adjustments toward a leverage target.
Keywords: Capital Structure, Corporate Finance
JEL Classification: G32
Suggested Citation: Suggested Citation