Corporate Investment and Financing Dynamics

Category: Finance Seminar
When: 24 November 2015
, 16:15
 - 17:30
Where: House of Finance, E01 Deutsche Bank

This paper studies the behavior of leverage ratios in a dynamic trade-o ff model with real frictions. Firms underutilize debt when fi nancing investment to retain fi nancial flexibility. Underutilization of debt persists even when fi rms exercise their last investment options, and it is more (less) severe for more back-loaded (front-loaded) investment opportunities. Thus, leverage dynamics crucially hinge upon the structure of the investment process and otherwise identical fi rms appear to have signi cantly diff erent target leverage ratios. Structural estimation of key parameters reveals that simulated model moments can match data moments. We obtain capital structure regression results in line with the empirical evidence, and explain the empirical puzzle that average leverage ratios are path-dependent and persistent for extended periods of time.