Arbeitspapier
Optimal leverage, its benefits, and the business cycle
We study the effect of the business cycle on optimal capital structure choice and the benefit to leverage. We propose a regime switching model with a state-dependent cash flow process to capture macroeconomic risk in a firm's cash flow. Our model is parsimonious but still realistic and allows for a wide range of analysis. We find pro-cyclical optimal leverage ratios, benefits to leverage, and costs of operating at a non-optimal leverage. If macroeconomic risk decreases, i.e. earnings become more stable and growth rates less volatile, optimal leverage and its benefits increase due to lower default risk. The regime switching property of EBIT traces observed EBIT paths closely and is applicable to a wide range of corporate valuation models. Our model offers novel empirically testable implications, such as higher tax benefits after the change in macroeconomic risk since the late 1980s and common capital structure adjustments in recessions and around turning points.
- Sprache
-
Englisch
- Erschienen in
-
Series: CFR working paper ; No. 11-12
- Klassifikation
-
Wirtschaft
Financial Markets and the Macroeconomy
Asset Pricing; Trading Volume; Bond Interest Rates
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- Thema
-
capital structure
macroeconomic risk
regime switching
benefit to leverage
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Hess, Dieter
Immenkötter, Philipp
- Ereignis
-
Veröffentlichung
- (wer)
-
University of Cologne, Centre for Financial Research (CFR)
- (wo)
-
Cologne
- (wann)
-
2011
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:45 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Hess, Dieter
- Immenkötter, Philipp
- University of Cologne, Centre for Financial Research (CFR)
Entstanden
- 2011
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