Journal of Financial and Quantitative Analysis Vol. 47 No. 3 2012

Equity Mispricing and Leverage Adjustment Costs

Richard S. Warr¹; William Elliott²; Johanna Koëter-Kant³; Özde Öztekin^4,5

¹ North Carolina State University · ² The University of Texas at El Paso · ³ Vrije Universiteit Amsterdam · ⁴ Florida International University · ⁵ College of Business Administration

Abstract

We find that equity mispricing impacts the speed at which firms adjust to their target leverage (TL) and does so in predictable ways depending on whether the firm is over- or underlevered. For example, firms that are above their TL and should therefore issue equity (or retire debt) adjust more rapidly toward their target when their equity is overvalued. However, when a firm is undervalued but needs to reduce leverage, the speed of adjustment is much slower. Our findings support the role of equity mispricing as an important factor that alters the cost of making capital structure adjustments.

DOI

10.1017/s0022109012000051

Volume

47

Issue

3

Pages

589-616

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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