Leverage Dynamics over the Business Cycle

Michael Halling, Jin Yu, Josef Zechner

Publication: Scientific journalJournal articlepeer-review


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.
Original languageEnglish
Pages (from-to)21 - 41
JournalJournal of Financial Economics
Issue number1
Publication statusPublished - 2016

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502004 Banking management
  • 502052 Business administration
  • 502
  • 502009 Corporate finance

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