Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers
Journal article, Peer reviewed
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- Scientific articles 
Original versionReview of Finance, Volume 25, Issue 2, March 2021, Pages 275–324, 10.1093/rof/rfaa018
We test whether high-frequency net-debt issuers (HFIs)—public industrial companies with relatively low issuance costs and high debt-financing benefits—manage leverage toward long-run targets. Our answer is they do not: (1) the leverage–profitability correlation is negative even in quarters with leverage rebalancing; (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers; and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic trade-off theory, the theory does not appear to hold.