The Intertemporal Behavior of Corporate Debt Policy

James S. Ang

Journal of Financial and Quantitative Analysis, 1976, vol. 11, issue 4, 555-566

Abstract: This study provides, as a result of comprehensive search, a better description of the intertemporal behaviors of corporate debt policy, comparable to those that exist for dividend policy. Although leverage policy may vary a great deal from firm to firm, we found that: (1) The rather simple partial adjustment model with constant payout ratio to have the best predictive performance and other superior models include the first-order markov process and the historical average leverage ratio; (2) in general, firms seem to operate with a concept of “target leverage ratio,” e.g., target ratio computed from the partial adjustment models, or from historical or industry averages; (3) there is some weak evidence of the presence of unused debt capacity for the total sample; (4) the average speed of adjustment to close the gap between the desired and actual leverage ratio is a respectable 67 percent in the first year (due to the lumpiness of debt issue, individual firms tend to be either under or overadjusted); (5) there are some indications that firms also adjust debt behavior to anticipated future increases or decreases in assets.There are several areas for future research, for instance, the best debt model could serve as the first stage of a possible two-stage equation in the empirical verification of the MSM's assumption of the independence of the investment decision to the financing decision (e.g., [7]), on a further exploration of how firms' expectations affect debt behavior. Finally, the existence of a rational target leverage ratio should encourage research interest concerning the existence of an empirically testable optimal leverage ratio.

Date: 1976
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