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 to 25% of firms with pro-cyclical dynamics whose characteristics are consistent with counter-cyclical dynamics for loss-given-default and probability of default.
|Pages (from-to)||21 - 41|
|Journal||Journal of Financial Economics|
|Publication status||Published - 2016|
Austrian Classification of Fields of Science and Technology (ÖFOS)
- 502004 Banking management
- 502052 Business administration
- 502009 Corporate finance