Asymmetries in the Firm's use of debt to changing market values

Stephen P. Ferris; Jan Hanousek; Anastasiya Shamshur; Jiri Tresl

doi:10.1016/j.jcorpfin.2017.12.006

Asymmetries in the Firm's use of debt to changing market values

Stephen P. Ferris, Jan Hanousek, Anastasiya Shamshur, Jiri Tresl

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

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Abstract

Using a 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 only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.

Original language	English
Pages (from-to)	542–555
Journal	Journal of Corporate Finance
Volume	48
Early online date	12 Dec 2017
DOIs	https://doi.org/10.1016/j.jcorpfin.2017.12.006
Publication status	Published - Feb 2018

Keywords

Market leverage
Book leverage
Capital structure
Adjustment speed

Access to Document

10.1016/j.jcorpfin.2017.12.006Licence: CC BY

JCorpFin_2017_Ferris_etalAccepted author manuscript, 901 KBLicence: CC BY

http://linkinghub.elsevier.com/retrieve/pii/S0929119917304078Licence: CC BY

Cite this

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title = "Asymmetries in the Firm's use of debt to changing market values",

abstract = "Using a 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 only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.",

keywords = "Market leverage, Book leverage, Capital structure, Adjustment speed",

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AU - Ferris, Stephen P.

AU - Hanousek, Jan

AU - Shamshur, Anastasiya

AU - Tresl, Jiri

PY - 2018/2

Y1 - 2018/2

N2 - Using a 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 only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.

AB - Using a 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 only when the changes in market leverage are due to increases in equity values. No adjustment is observed when firm equity values decrease. Our results are consistent with Myers (1977) and Barclay et al. (2006) who argue that optimal debt levels decrease with corporate growth opportunities.

KW - Market leverage

KW - Book leverage

KW - Capital structure

KW - Adjustment speed

U2 - 10.1016/j.jcorpfin.2017.12.006

DO - 10.1016/j.jcorpfin.2017.12.006

M3 - Article

VL - 48

SP - 542

EP - 555

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

SN - 0929-1199

ER -