Are Corporates' Target Leverage Ratios Time-Dependent?
17 Pages Posted: 25 Apr 2007
This paper extends the stationary-leverage-ratio model to incorporate a time-dependent target leverage ratio. The theoretical hypothesis of the existence of a time-dependent target leverage ratio reflects the movement of a firm's initial target ratio toward a long-term target ratio over time. Using some simple scenarios about the time-dependence of the target leverage ratio, the numerical results show that the incorporation of the hypothesis into the stationary-leverage-ratio model is capable of producing term structures of probabilities of default that are consistent with some empirical findings. The results provide some evidences to support the hypothesis.
Keywords: Credit Risk Models, Credit Ratings, Default Probability
JEL Classification: G21, G28, G13
Suggested Citation: Suggested Citation