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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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Journal ArticleDOI
TL;DR: The Theory of Corporate Finance as discussed by the authors is an indispensable resource for graduate and advanced undergraduate students as well as researchers of corporate finance, industrial organization, political economy, development, and macroeconomics.
Abstract: The past twenty years have seen great theoretical and empirical advances in the field of corporate finance Whereas once the subject addressed mainly the financing of corporations--equity, debt, and valuation--today it also embraces crucial issues of governance, liquidity, risk management, relationships between banks and corporations, and the macroeconomic impact of corporations However, this progress has left in its wake a jumbled array of concepts and models that students are often hard put to make sense of Here, one of the world's leading economists offers a lucid, unified, and comprehensive introduction to modern corporate finance theory Jean Tirole builds his landmark book around a single model, using an incentive or contract theory approach Filling a major gap in the field, The Theory of Corporate Finance is an indispensable resource for graduate and advanced undergraduate students as well as researchers of corporate finance, industrial organization, political economy, development, and macroeconomics Tirole conveys the organizing principles that structure the analysis of today's key management and public policy issues, such as the reform of corporate governance and auditing; the role of private equity, financial markets, and takeovers; the efficient determination of leverage, dividends, liquidity, and risk management; and the design of managerial incentive packages He weaves empirical studies into the book's theoretical analysis And he places the corporation in its broader environment, both microeconomic and macroeconomic, and examines the two-way interaction between the corporate environment and institutions Setting a new milestone in the field, The Theory of Corporate Finance will be the authoritative text for years to come

1,602 citations

Journal ArticleDOI
TL;DR: In this article, the authors consider the effect of share price changes on market-valued leverage and conclude that firms do have target capital structures, as opposed to market timing or pecking order considerations, which explains a majority of the observed changes in capital structure.
Abstract: The literature provides conflicting assessments about how firms choose their capital structures, with the "tradeoff", pecking order, and market timing hypotheses all receiving some empirical support. Distinguishing among these theories requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have relied on empirical specifications that fail to recognize the potential impact of adjustment costs on a firm's observed leverage. Likewise, few researchers have incorporated the effect of share price changes on market-valued leverage. We estimate a relatively general, partial-adjustment model of firm leverage decisions, and conclude that firms do have target capital structures. The typical firm closes more than half the gap between its actual and its target debt ratios within two years. 'Targeting' behavior as opposed to market timing or pecking order considerations explains a majority of the observed changes in capital structure.

1,556 citations

Journal ArticleDOI
TL;DR: This paper found that firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do those in the bottom level of leverage, and a similar decline takes place in the market value of equity.
Abstract: This study finds that highly leveraged firms lose substantial market share to their more conservatively financed competitors in industry downturns. Specifically, firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms that engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries. FINANCIAL ECONOMISTS HAVE NOT reached a consensus on how financial distress affects corporate performance. Traditionally, the financial economics literature has portrayed financial distress as a costly event whose possibility is important in determining firms' optimal capital structures. Financial distress is seen as costly because it creates a tendency for firms to do things that are harmful to debtholders and nonfinancial stakeholders (i.e., customers, suppliers, and employees), impairing access to credit and raising costs of stakeholder relationships.1 In addition, financial distress can be costly if a firm's weakened condition induces an aggressive response by competitors seizing the opportunity to gain market share.2 More recent articles have

1,515 citations

Journal ArticleDOI
TL;DR: The joint determination of capital structure and investment risk is examined in this article, where the optimal amount of debt balances the tax deductions provided by interest payments against the external costs of potential default.
Abstract: The joint determination of capital structure and investment risk is examined. Optimal capital structure reflects both the tax advantages of debt less default costs (Modigliani and Miller (1958, 1963)), and the agency costs resulting from asset substitution (Jensen and Meckling (1976)). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is small for the range of environments considered. Risk management is also examined. Hedging permits greater leverage. Even when a firm cannot precommit to hedging, it will still do so. Surprisingly, hedging benefits often are greater when agency costs are low. THE CHOICE OF INVESTMENT FINANCING, and its link with optimal risk exposure, is central to the economic performance of corporations. Financial economics has a rich literature analyzing the capital structure decision in qualitative terms. But it has provided relatively little specific guidance. In contrast with the precision offered by the Black and Scholes (1973) option pricing model and its extensions, the theory addressing capital structure remains distressingly imprecise. This has limited its application to corporate decision making. Two insights have profoundly shaped the development of capital structure theory. The arbitrage argument of Modigliani and Miller (M-M) (1958, 1963) shows that, with fixed investment decisions, nonfirm claimants must be present for capital structure to affect firm value. The optimal amount of debt balances the tax deductions provided by interest payments against the external costs of potential default. Jensen and Meckling (J-M) (1976) challenge the M-M assumption that investment decisions are independent of capital structure. Equityholders of a levered firm, for example, can potentially extract value from debtholders by increasing investment risk after debt is in place: the "asset substitution" problem. Such predatory behavior creates agency costs that the choice of capital structure must recognize and control.

1,510 citations

Posted Content
TL;DR: In this paper, the authors examine leverage levels and year-to-year changes for several hundred firms between 1984 and 1991 and find that leverage levels are positively related to CEO stock ownership and CEO stock option holdings, and negatively related toCEO tenure and board of directors size.
Abstract: We test the prediction that leverage is inversely associated with managerial entrenchment. We examine leverage levels and year-to-year changes for several hundred firms between 1984 and 1991. We find that leverage levels are positively related to CEO stock ownership and CEO stock option holdings, and negatively related to CEO tenure and board of directors size. While generally consistent with less entrenched CEOs pursuing more leverage, these results are subject to alternative interpretations. We therefore analyze year-to-year changes in leverage around exogenous shocks to corporate governance variables. We find that leverage increases after unsuccessful tender offers and â¬Sforcedâ¬? CEO replacements, and under certain conditions after the arrival of major stockholders. These relations have greater magnitude when the sample is restricted to low-leverage firms, even when 80% of firms are defined as low-leverage. The results are consistent with decreases in entrenchment leading to increases in leverage, and with the majority of firms having less debt than optimal.

1,451 citations


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Performance
Metrics
No. of papers in the topic in previous years
YearPapers
20224
2021552
2020869
2019866
2018767
2017886