Activity: Talk or presentation › Science to professionals/public
Description
There remains broad disagreement about what the important drivers of capital structure dynamics are. This paper sheds new light on this question by studying the business cycle dynamics of leverage ratios, using a comprehensive sample of firms from 19 countries. Our main finding is that book leverage evolves pro-cyclically but market leverage counter-cyclically. This empirical pattern is difficult to reconcile with any single theoretical capital structure model. We also find that leverage dynamics are dramatically different for financially constrained and unconstrained firms and that the origin of law, as a proxy for the development of public markets, matters. Finally, we find that leverage adjusts more slowly to target levels during recessions and that this effect is amplified for firms from civil law countries.