Topic
Leverage (finance)
About: Leverage (finance) is a research topic. Over the lifetime, 11860 publications have been published within this topic receiving 321286 citations. The topic is also known as: gearing.
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TL;DR: In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium prices of debt and equity.
Abstract: In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms’ capital structures. Extant evidence bearing on these predictions is examined.
2,569 citations
TL;DR: This paper found that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage.
2,476 citations
TL;DR: The authors examined the relation between the variance of equity returns and several explanatory variables and found that equity variances have a strong positive association with both financial leverage and, contrary to the predictions of the options literature, interest rates.
2,469 citations
TL;DR: This paper developed a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices, and found that monetary policy should not target asset prices as a means of reducing output and inflation volatility.
Abstract: I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.
2,382 citations
TL;DR: This article examined the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003 and found that the most reliable factors for explaining market leverage are: median industry leverage, market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+).
Abstract: This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.
2,380 citations