Equity Mispricing and Leverage Adjustment Costs

R.S. Warr, W.B. Elliott, J. Koeter-Kant, O. Oztekin

Research output: Contribution to JournalArticleAcademicpeer-review

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. © Copyright 2012 Michael G. Foster School of Business, University of Washington.
Original languageEnglish
Pages (from-to)589-616
JournalJournal of Financial and Quantitative Analysis
Volume47
Issue number3
DOIs
Publication statusPublished - 2012

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