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Leverage and capital utilization

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  • Diogo Duarte
  • Hamilton Galindo
  • Alexis Montecinos

Abstract

Our paper documents that capital utilization and short-term debt are procyclical. We show that a strong positive relationship exists both at the aggregate and firm levels, and it persists even when we control the regressions for firm size, profits, growth, and business cycle effects. In addition, our DSGE model shows that in the presence of capital utilization, positive real and financial shocks cause the firm to change its financing of the equity payout policy from earnings to debt, resulting in an increase in short-term debt. Therefore, ignoring the firm's optimal decision on capital utilization may lead to misleading conclusions on how leverage is undertaken.

Suggested Citation

  • Diogo Duarte & Hamilton Galindo & Alexis Montecinos, 2022. "Leverage and capital utilization," The European Journal of Finance, Taylor & Francis Journals, vol. 28(8), pages 801-824, May.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:8:p:801-824
    DOI: 10.1080/1351847X.2021.1924215
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