Leverage dynamics over the business cycle

Michael Halling, Jin Yu, Josef Zechner

Research output: Contribution to journalArticleResearchpeer-review

20 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)21-41
Number of pages21
JournalJournal of Financial Economics
Volume122
Issue number1
DOIs
Publication statusPublished - 1 Oct 2016
Externally publishedYes

Keywords

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

Cite this

Halling, Michael ; Yu, Jin ; Zechner, Josef. / Leverage dynamics over the business cycle. In: Journal of Financial Economics. 2016 ; Vol. 122, No. 1. pp. 21-41.
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Leverage dynamics over the business cycle. / Halling, Michael; Yu, Jin; Zechner, Josef.

In: Journal of Financial Economics, Vol. 122, No. 1, 01.10.2016, p. 21-41.

Research output: Contribution to journalArticleResearchpeer-review

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