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Capital structure dynamics and transitory debt

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  • DeAngelo, Harry
  • DeAngelo, Linda
  • Whited, Toni M.

Abstract

Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic capital structure model with these features and find that it replicates industry leverage very well, explains debt issuances/repayments better than extant tradeoff models, and accounts for the leverage changes accompanying investment "spikes." It generates leverage ratios with slow average speeds of adjustment to target, which are dampened by intentional temporary movements away from target, not debt issuance costs.

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Bibliographic Info

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

Volume (Year): 99 (2011)
Issue (Month): 2 (February)
Pages: 235-261

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:2:p:235-261

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

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Keywords: Dynamic capital structure Financial flexibility Target capital structure;

References

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Citations

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Cited by:
  1. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
  2. Drobetz, Wolfgang & Gounopoulos, Dimitrios & Merikas, Andreas & Schröder, Henning, 2013. "Capital structure decisions of globally-listed shipping companies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 49-76.
  3. Dudley, Evan, 2012. "Capital structure and large investment projects," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1168-1192.
  4. Patrick Bolton & Hui Chen & Neng Wang, 2014. "Debt, Taxes, and Liquidity," NBER Working Papers 20009, National Bureau of Economic Research, Inc.
  5. Theodosios Dimopoulos & Stefano Sacchetto, . "Technological Heterogeneity and Corporate Investment," GSIA Working Papers 2012-E48, Carnegie Mellon University, Tepper School of Business.
  6. Lee, Cheng-Few & Kuo, Nan-Ting, 2014. "Effects of ultimate ownership structure and corporate tax on capital structures: Evidence from Taiwan," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 409-425.
  7. Mónika Kuti, 2011. "Cash Flow at Risk, Financial Flexibility and Financing Constraint," Public Finance Quarterly, State Audit Office of Hungary, vol. 56(4), pages 505-517.
  8. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
  9. Faulkender, Michael & Flannery, Mark J. & Hankins, Kristine Watson & Smith, Jason M., 2012. "Cash flows and leverage adjustments," Journal of Financial Economics, Elsevier, vol. 103(3), pages 632-646.
  10. Missaka Warusawitharana & Toni M. Whited, 2013. "Equity market misvaluation, financing, and investment," Finance and Economics Discussion Series 2013-78, Board of Governors of the Federal Reserve System (U.S.).
  11. Lockhart, G. Brandon, 2014. "Credit lines and leverage adjustments," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 274-288.
  12. Bessler, Wolfgang & Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan, 2013. "The international zero-leverage phenomenon," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 196-221.
  13. Hess, Dieter & Immenkötter, Philipp, 2014. "How much is too much? Debt capacity and financial flexibility," CFR Working Papers 14-03, University of Cologne, Centre for Financial Research (CFR).
  14. 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.
  15. Paula Antão & Diana Bonfim, 2012. "The dynamics of capital structure decisions," Working Papers w201206, Banco de Portugal, Economics and Research Department.
  16. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
  17. Mitsuru Katagiri, 2011. "A Macroeconomic Approach to Corporate Capital Structure," IMES Discussion Paper Series 11-E-28, Institute for Monetary and Economic Studies, Bank of Japan.
  18. Anastassiadis, Friederike & Liebe, Ulf & Musshoff, Oliver, 2012. "Finanzielle Flexibilität In Landwirtschaftlichen Investitionsentscheidungen: Ein Discrete Choice Experiment," 52nd Annual Conference, Stuttgart, Germany, September 26-28, 2012 137142, German Association of Agricultural Economists (GEWISOLA).
  19. Roberto Steri & Lukas Schmid, 2013. "Dynamic Corporate Liquidiy," 2013 Meeting Papers 1266, Society for Economic Dynamics.

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