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Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers
[The leverage ratchet effect]

Author

Listed:
  • B Espen Eckbo
  • Michael Kisser

Abstract

We test whether high-frequency net-debt issuers (HFIs)—public industrial companies with relatively low issuance costs and high debt-financing benefits—manage leverage toward long-run targets. Our answer is they do not: (1) the leverage–profitability correlation is negative even in quarters with leverage rebalancing; (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers; and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic trade-off theory, the theory does not appear to hold.

Suggested Citation

  • B Espen Eckbo & Michael Kisser, 2021. "Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers [The leverage ratchet effect]," Review of Finance, European Finance Association, vol. 25(2), pages 275-324.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:2:p:275-324.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa018
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    Citations

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    Cited by:

    1. Usman, Adam, 2022. "Cash holdings and real asset liquidity," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Kisser, Michael & Rapushi, Loreta, 2022. "Equity issues, creditor control and market timing patterns: Evidence from leverage decreasing recapitalizations," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 196-216.
    3. Andrey Kulikov & Naief Alabed Alkader & Galina Panaedova & Aleksandr Ogorodnikov & Evgenii Rebeka, 2023. "Modelling Optimal Capital Structure in Gas and Oil Sector by Applying Simulation Theory and Programming Language of Python (Qatar Gas Transport Company)," Energies, MDPI, vol. 16(10), pages 1-15, May.
    4. Yuan, Liuchuang & Jiang, Jinglu & Mu, Congming & Chen, Tuyue, 2023. "Dynamic liquidity management with asymmetric adjustment costs," Finance Research Letters, Elsevier, vol. 58(PA).

    More about this item

    Keywords

    High-frequency debt issuer; issue costs and benefits; dynamic rebalancing; leverage profitability relation; speed of adjustment; tradeoff theory;
    All these keywords.

    JEL classification:

    • 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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