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Equity Mispricing and Leverage Adjustment Costs
Warr, Richard S. Elliott, William Koeter-Kant, Johanna Öztekin, Özde
Warr, Richard S.
Elliott, William
Koeter-Kant, Johanna
Öztekin, Özde
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Abstract
We find that equity mispricing impacts the speed at which firms adjust to their target leverage (TL) and does so in predictable ways depending on whether the firm is over- or underlevered. For example, firms that are above their TL and should therefore issue equity (or retire debt) adjust more rapidly toward their target when their equity is overvalued. However, when a firm is undervalued but needs to reduce leverage, the speed of adjustment is much slower. Our findings support the role of equity mispricing as an important factor that alters the cost of making capital structure adjustments.
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COPYRIGHT 2012, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
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2012-06
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Cambridge University Press
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Richard S. Warr, William B. Elliott, Johanna Koëter-Kant and Özde Öztekin (2012). Equity Mispricing and Leverage Adjustment Costs. Journal of Financial and Quantitative Analysis, 47, pp 589-616 http://dx.doi.org/10.1017/S0022109012000051