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Asymmetries in the Firm's use of debt to changing market values

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  • Ferris, Stephen P.
  • Hanousek, Jan
  • Shamshur, Anastasiya
  • Tresl, Jiri

Abstract

Using a sample of U.S. firms over the period, 1984 to 2013, this study examines the relation between market and book leverage ratios. Unlike Welch (2004) who contends that changes in market leverage do not induce adjustments in book leverage, we find an asymmetric effect. That is, firms adjust their book leverage only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.

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  • Ferris, Stephen P. & Hanousek, Jan & Shamshur, Anastasiya & Tresl, Jiri, 2018. "Asymmetries in the Firm's use of debt to changing market values," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 542-555.
    • Handle: RePEc:eee:corfin:v:48:y:2018:i:c:p:542-555
    DOI: 10.1016/j.jcorpfin.2017.12.006
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    More about this item

    Keywords

    Market leverage; Book leverage; Capital structure; Adjustment speed;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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