Equity Mispricing and Leverage Adjustment Costs
Issue Date
2012-06Author
Warr, Richard S.
Elliott, William
Koeter-Kant, Johanna
Öztekin, Özde
Publisher
Cambridge University Press
Type
Article
Article Version
Scholarly/refereed, publisher version
Metadata
Show full item recordAbstract
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.
Description
COPYRIGHT 2012, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
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Citation
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
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