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Cash flows and leverage adjustments

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Author Info

  • Faulkender, Michael
  • Flannery, Mark J.
  • Hankins, Kristine Watson
  • Smith, Jason M.

Abstract

Recent research has emphasized the impact of transaction costs on firm leverage adjustments. We recognize that cashflow realizations can provide opportunities to adjust leverage at relatively low marginal cost. We find that a firm's cashflow features affect not only the leverage target, but also the speed of adjustment toward that target. Heterogeneity in adjustment speeds is driven by an economically meaningful concept: adjustment costs. Accounting for this fact produces adjustment speeds that are significantly faster than previously estimated in the literature. We also analyze how both financial constraints and market timing variables affect adjustments toward a leverage target.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 103 (2012)
Issue (Month): 3 ()
Pages: 632-646

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Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:632-646

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Leverage; Target; Speed of adjustment; Adjustment costs;

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References

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Citations

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Cited by:
  1. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks," Working Papers hal-00918579, HAL.
  2. Antonio Falato & Dalida Kadyrzhanova & Jae W. Sim, 2013. "Rising intangible capital, shrinking debt capacity, and the US corporate savings glut," Finance and Economics Discussion Series 2013-67, Board of Governors of the Federal Reserve System (U.S.).
  3. Filippo Ippolito & Roberto Steri & Claudio Tebaldi, 2011. "The Relative Leverage Premium," Working Papers 398, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Olga Kuzmina, 2013. "Operating Flexibility and Capital Structure: Evidence from a Natural Experiment," Working Papers w0197, Center for Economic and Financial Research (CEFIR).
  5. Brown, James R. & Floros, Ioannis V., 2012. "Access to private equity and real firm activity: Evidence from PIPEs," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 151-165.
  6. Dudley, Evan, 2012. "Capital structure and large investment projects," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1168-1192.
  7. Cicero, David & Wintoki, M. Babajide & Yang, Tina, 2013. "How do public companies adjust their board structures?," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 108-127.
  8. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Dynamic capital structure and political patronage: The case of Malaysia," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 117-128.
  9. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
  10. Shen, Carl Hsin-han, 2014. "Pecking order, access to public debt market, and information asymmetry," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 291-306.

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