Leverage dynamics over the business cycle

Michael Halling, Jin Yu, Josef Zechner

Research output: Contribution to journalArticleResearchpeer-review

35 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)21-41
Number of pages21
JournalJournal of Financial Economics
Issue number1
Publication statusPublished - 1 Oct 2016
Externally publishedYes


  • Business cycle variation
  • Capital structure dynamics
  • Empirical corporate finance

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