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Corporate Leverage and the Dynamics of Its Components

Published online by Cambridge University Press:  09 December 2019

Armen HovakimianOpen the ORCID record for Armen Hovakimian[Opens in a new window] and
Gayané Hovakimian
Armen Hovakimian*
Affiliation:
A. Hovakimian, armen.hovakimian@baruch.cuny.edu, Baruch College Zicklin School of Business
Gayané Hovakimian
Affiliation:
G. Hovakimian, hovakimian@fordham.edu, Fordham University Gabelli School of Business
*
A. Hovakimian (corresponding author), armen.hovakimian@baruch.cuny.edu
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Abstract

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We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas time-series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, or more focused or that have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 2 , March 2021, pp. 499 - 530
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2019

Footnotes

We thank Harry DeAngelo, Mark Flannery (the referee), Paul Malatesta (the editor), and participants at the 2018 Financial Management Association Asia Conference and the seminar at Baruch College for helpful comments. A. Hovakimian thanks the Bert and Sandra Wasserman endowment for financial support.

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