Review of Finance Vol. 25 No. 2 2021

Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers

B. Espen Eckbo^1,2,3; Michael Kisser⁴

¹ Tuck School of Business at Dartmouth · ² European Corporate Governance Institute (ECGI) · ³ Norwegian School of Economics (NHH), and · ⁴ BI Norwegian Business School

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.

DOI

10.1093/rof/rfaa018

Volume

25

Issue

2

Pages

275-324

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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