Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers

B. Espen Eckbo · Michael Kisser

29 citations0/0 files storedEuropean Finance Review

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Corporate Finance and Governance Financial Analysis and Corporate Governance Corporate Insolvency and Governance

Abstract

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.

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References

1998Initial conditions and moment restrictions in dynamic panel data models 1984Corporate financing and investment decisions when firms have information that investors do not have 1995Initial conditions and moment restrictions in dynamic panel data models 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 2009Why Do U.S. Firms Hold So Much More Cash than They Used To?2005Partial adjustment toward target capital structures 2008Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure

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