Abstract
This paper is a study of the financing actions by firms to adjust leverage: debt reductions, stock sales, debt issues, and stock purchases. Each type of action is positively autocorrelated. The standard empirical models of corporate leverage produce leverage targets that do not correctly predict actual debt issues and stock sales. Firm-specific time-series regressions with the logarithm of firm assets and market-to-book as regressors, correctly predict these patterns. The estimates imply that on average firms adjust toward their target much faster than generally understood, closing about half of the leverage gap in a year.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 384-402 |
| Number of pages | 19 |
| Journal | Journal of Banking and Finance |
| Volume | 106 |
| DOIs | |
| State | Published - Sep 2019 |
Bibliographical note
Funding Information:We have benefited from discussions with Harry DeAngelo, Peter DeMarzo, Mark Flannery, Jeremy Graveline, Zhiguo He, Armen Hovakimian (discussant), Yuri Tserlukevich (discussant), Jaime Zender, a particularly helpful anonymous referee, and seminar participants at the 2017 AFA meetings and at Tsinghua University. Tao Shen thanks the National Natural Science Foundation of China (grant ID 71603147 ) for financial support. We alone are responsible for any errors.
Funding Information:
We have benefited from discussions with Harry DeAngelo, Peter DeMarzo, Mark Flannery, Jeremy Graveline, Zhiguo He, Armen Hovakimian (discussant), Yuri Tserlukevich (discussant), Jaime Zender, a particularly helpful anonymous referee, and seminar participants at the 2017 AFA meetings and at Tsinghua University. Tao Shen thanks the National Natural Science Foundation of China (grant ID 71603147) for financial support. We alone are responsible for any errors.
Publisher Copyright:
© 2019 Elsevier B.V.
Keywords
- Corporate leverage target
- Debt issues
- Debt reductions
- Stock purchases
- Stock sales