Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers. (14th July 2020)

• Record Type: Journal Article
• Authors: Eckbo, B Espen; Kisser, Michael
• Is Part Of: Review of finance. Volume 25:Number 2(2021)
• Page Start: 275
• Page End: 324
• Publication Date: 2020-07-14
• Subjects: G32; High-frequency debt issuer -- issue costs and benefits -- dynamic rebalancing -- leverage profitability relation -- speed of adjustment -- tradeoff theory; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfaa018
• Languages: English
• ISSNs: 1572-3097

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.