2007 Headlines
Mark Leary's Paper Noted as One of Best Papers in Corporate Finance for 2006 by the American Finance Association
Paper Explores When and How Firms Rebalance their Capital Structures
January 11, 2007 | Ithaca, NY - Professor Mark Leary's paper "Do Firms Rebalance Their Capital Structures?" was recognized on January 6, 2007 as one of the top three papers in corporate finance for 2006, receiving a "Distinguished Paper" award from the American Finance Association. All papers published in The Journal of Finance in 2006 are eligible for prizes. Mark Leary is an assistant professor of finance at the Johnson School at Cornell University.
Co-authored by Michael Roberts at The Wharton School, University of Pennsylvania, the paper finds that firms actively rebalance their capital structures to stay within an optimal range that balances the costs and benefits associated with varying degrees of financial leverage. While shocks to leverage may push leverage away from its optimal level for extended periods, this is more likely due to adjustment costs than indifference toward capital structure as argued by past research. Further, their research shows that:
- The presence of adjustment costs results in shocks having a persistent effect on leverage, despite active rebalancing behavior by firms.
- Consistent with the nature of security issuance costs, firms are often inactive with respect to their financial policy, but when they do issue or repurchase debt and equity, they tend to do so in several closely spaced, often consecutive, quarters.
- The effect of equity issuances on firms' leverage is erased within two years by subsequent debt issuances.
- The effect of large positive or negative equity shocks on leverage is erased within the two to four years subsequent to the shock by debt issuances or retirements.
- The finding of a significant response to both low or decreasing leverage and high or increasing leverage is consistent with the existence of a target range for leverage, but firms appear more concerned about excessively high leverage than excessively low leverage.
To view a copy of the paper or to speak with Mark Leary about this research, please contact:
Deirdre Snyder
Public Relations Officer
The Johnson School at Cornell University
Email: dgs37@cornell.edu
Phone: 607.255.3494
Cell: 607.592.2188
