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Credit lines and leverage adjustments

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  • Lockhart, G. Brandon

Abstract

Adjustment costs play a prominent role in explanations of capital structure, but the extent of their economic importance is unknown. A credit line has institutional features important for this analysis, notably its sunk costs of access to the debt market, its revolving nature, and its covenant-sourced contingent nature. I find that the credit line is associated with cross-sectional variation in estimated speeds of adjustment to target leverage in patterns consistent with the importance of adjustment costs, and with the importance of maintaining financial flexibility for liquidity and investment needs.

Suggested Citation

  • Lockhart, G. Brandon, 2014. "Credit lines and leverage adjustments," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 274-288.
    • Handle: RePEc:eee:corfin:v:25:y:2014:i:c:p:274-288
    DOI: 10.1016/j.jcorpfin.2013.12.011
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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