Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers*

The leverage ratchet effect

Bjorn Eckbo () and Michael Kisser

Review of Finance, 2021, vol. 25, issue 2, 275-324

Abstract: We test whether high-frequency net-debt issuers (HFIs)—public industrial companies with relatively low issuance costs and high debt-financing benefits—manage leverage toward long-run targets. Our answer is they do not: (1) the leverage–profitability correlation is negative even in quarters with leverage rebalancing; (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers; and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic trade-off theory, the theory does not appear to hold.

Keywords: High-frequency debt issuer; issue costs and benefits; dynamic rebalancing; leverage profitability relation; speed of adjustment; tradeoff theory (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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