Leverage dynamics over the business cycle

Michael Halling, Jin Yu and Josef Zechner

Journal of Financial Economics, 2016, vol. 122, issue 1, 21-41

Abstract: Surprisingly little is known about the business cycle dynamics of leverage. The existing evidence documents that target leverage evolves pro-cyclically either for all firms or financially constrained ones. In contrast, we show that, on average, target leverage ratios evolve counter-cyclically once cyclicality is measured comprehensively, accounting for variation in explanatory variables and model parameters. These counter-cyclical dynamics are robust to different subsamples of firms, data samples, empirical models of leverage, and definitions of leverage. There is a fraction of 10–25% of firms with pro-cyclical dynamics whose characteristics are consistent with counter-cyclical dynamics for loss-given-default and probability of default.

Keywords: Empirical corporate finance; Capital structure dynamics; Business cycle variation (search for similar items in EconPapers)
JEL-codes: G15 G32 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X16301222
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:122:y:2016:i:1:p:21-41

DOI: 10.1016/j.jfineco.2016.07.001

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).