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Cash flows and leverage adjustments

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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