Uncertainty, investment spikes, and corporate leverage adjustments

Hyun Joong Im, Robert Faff and Chang Yong Ha

Journal of Banking & Finance, 2022, vol. 145, issue C

Abstract: We study the joint effects of uncertainty and investment spikes on corporate leverage adjustments. In our baseline finding we show that, while uncertainty has a nontrivial adjustment speed effect for overlevered firms, underlevered firms are not greatly impacted. In our second baseline finding, we document asymmetric effects of investment spikes on the adjustment speed between overlevered and underlevered firms. Specifically, during the investment-spike period, underlevered firms adjust their leverage very promptly, whereas overlevered firms tend to adjust their leverage much more slowly. Bringing these two baseline analyses together in a combined analysis, conditional on the level of uncertainty, the investment regime has asymmetric effects between overlevered and underlevered firms. Specifically, when uncertainty is fixed, regardless of whether uncertainty is high or low, overlevered firms facing investment spikes tend to adjust their leverage slower than their non-spike counterparts, but underlevered firms facing investment spikes tend to adjust their leverage substantially faster than their non-spike counterparts. Further, we find that elevated uncertainty uniformly increases the speed of adjustment for overlevered firms without investment spikes, but the influence for underlevered firms without investment spikes is much less evident.

Keywords: Capital structure; Uncertainty; Investment spikes; Adjustment speeds (search for similar items in EconPapers)
JEL-codes: D21 D81 D92 G31 G32 G33 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:145:y:2022:i:c:s0378426622002291

DOI: 10.1016/j.jbankfin.2022.106649

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