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Asymmetries in the Firm's Use of Debt to Changing Market Values

Author

Listed:
  • Ferris, Stephen
  • Hanousek, Jan
  • Shamshur, Anastasiya
  • Tresl, Jiri

Abstract

Using a large 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 relative to market leverage only when the changes in market leverage are due to increases in the value of the firm's equity. No adjustment is observed when firm equity values decrease. We observe a number of interesting differences between those firms that make large and small capital structure adjustments in response to changing equity prices. Our results are consistent with Barclay, Morellec and Smith (2006) who argue that the optimal level of debt decreases in the presence of corporate growth options.

Suggested Citation

  • Ferris, Stephen & Hanousek, Jan & Shamshur, Anastasiya & Tresl, Jiri, 2017. "Asymmetries in the Firm's Use of Debt to Changing Market Values," CEPR Discussion Papers 12099, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12099
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    References listed on IDEAS

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    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March.
    2. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
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    4. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    5. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
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    7. Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
    8. Michael J. Barclay & Erwan Morellec, 2006. "On the Debt Capacity of Growth Options," The Journal of Business, University of Chicago Press, vol. 79(1), pages 37-60, January.
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    10. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
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    More about this item

    Keywords

    market leverage; book leverage; capital structure; adjustment speed;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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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