Asymmetries in the Firm’s Use of Debt to Changing Market Values

Jan Hanousek, Anastasiya Shamshur, Jiri Tresl and Stephen Ferris

No 12099, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a large sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book leverage, we find an asymmetric effect. That is, firms adjust their book leverage relative to market leverage only when the changes in market leverage are due to increases in the value of the firm’s equity. No adjustment is observed when firm equity values decrease. We observe a number of interesting differences between those firms that make large and small capital structure adjustments in response to changing equity prices. Our results are consistent with Barclay, Morellec and Smith (2006) who argue that the optimal level of debt decreases in the presence of corporate growth options.

Keywords: Market leverage; Book leverage; Adjustment speed; Capital structure (search for similar items in EconPapers)
JEL-codes: C23 G32 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-bec and nep-cfn
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