Business shocks and corporate leverage

Kelvin Jui Keng Tan, Qing Zhou, Zheyao Pan, Robert Faff

Research output: Contribution to journalArticlepeer-review

Abstract

We examine whether and to what extent business shocks explain the puzzling instabilities of corporate leverage. We find that business shocks explain a large portion of the unexplained leverage deviation, cross-sectional leverage position migration, and evaporating leverage similarities in the cross-section of firms. The cross-sectional distribution of corporate leverage is relatively persistent when there are fewer and smaller business shocks but becomes unstable for firms with larger business shocks. Our findings suggest that business shocks lead to discontinuities in the corporate value creation process and investment, thereby affecting corporate financing decisions. Put simply, the lumpiness of investment creates a “lumpy need for external financing. Our analysis implies that the empirical modeling of capital structure adjustment and, indeed, the modeling of other corporate policies, should be conditioned on business shocks.
Original languageEnglish
Article number106208
Pages (from-to)1-21
Number of pages21
JournalJournal of Banking and Finance
Volume131
Early online date12 Jun 2021
DOIs
Publication statusE-pub ahead of print - 12 Jun 2021

Keywords

  • Business shock
  • Capital structure
  • Instability
  • Leverage deviation

Fingerprint

Dive into the research topics of 'Business shocks and corporate leverage'. Together they form a unique fingerprint.

Cite this