Dynamic Leverage Targets

Filippo Ippolito, Stefano Sacchetto and Roberto Steri
Additional contact information
Filippo Ippolito: Universitat Pompeu Fabra, Barcelona Graduate School of Economics, and Centre for Economic Policy Research (CEPR)
Stefano Sacchetto: IESE Business School
Roberto Steri: University of Lausanne and Swiss Finance Institute

No 17-59, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Through the lens of a dynamic trade-off model of capital structure, we reconcile active capital structure rebalancing and slow average adjustment speeds towards target leverage, both of which have been documented by empirical studies. In the model, firms optimally adjust leverage towards a dynamic target, which is firm specific and responds to evolving firm characteristics and investment opportunities. In the presence of investment frictions and capital market imperfections, firms close only partially the gap that separates their current leverage from their target. Thus, targets are relatively less stable than leverage itself. By means of structural estimation, we show that there is convergence towards dynamic targets in the real data, at faster speed the larger the gap from the target. Over horizons ranging from five to thirty years, targets are roughly twenty to forty percent more volatile than leverage. Adjustment speeds exhibit significant heterogeneity across firms and time, and partial adjustment models that assume constant speed largely underestimate average speeds.

Keywords: target leverage; dynamic leverage adjustments; leverage stability (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2017-11, Revised 2018-01
New Economics Papers: this item is included in nep-cfn
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3063517 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1759

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().