Are target leverage ratios stable? Investigating the impact of corporate asset restructuring |
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| Institution: | 1. Department of Economics, Finance & Legal Studies, Culverhouse College of Commerce and Business Administration, P.O. Box 870224, University of Alabama, Tuscaloosa, AL 35487, United States;2. Department of Economics and Finance, School of Business, Alumni Hall 3147, Southern Illinois University Edwardsville, Edwardsville, IL 62026, United States;3. Department of Finance, College of Business, Harry Frazier Hall 274, 2301 South Third Street, University of Louisville, Louisville, KY 40292, United States;1. Eli Broad Graduate School of Management, Michigan State University, 645 West Shaw Lane, East Lansing, MI 48824-1121, USA;2. College of Business Administration, University of Missouri, St. Louis, One University Blvd., St. Louis, MO 63121, USA;3. Nottingham University Business School China, University of Nottingham Ningbo, 199 Taikang East Road, Ningbo 315100, China;1. School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China;2. Department of Information Management and Finance, National Chiao Tung University, 1001 Ta Hsueh Road, Hsinchu 30010, Taiwan, ROC;3. Department of Finance, Chung Yuan Christian University, 200 Chung Pei Road, Chung Li District, Taoyuan City 32023, Taiwan, ROC;1. Nottingham Trent University, Nottingham Business School, Burton Street, NG1 4BU Nottingham, UK;2. University of Macedonia, Department of Economics, 156 Egnatia Street, 54006 Thessaloniki, Greece;3. University of Bologna, Department of Economics, Via Anghera 22, 47900 Rimini, Italy;4. Wilfrid Laurier University, Canada;5. Johns Hopkins University, SAIS Bologna Center, Italy;6. Rimini Centre for Economic Analysis (RCEA), Italy |
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| Abstract: | If firms balance the benefits and costs of leverage, then we might expect corporate asset shocks to trigger a change in corporate target leverage. We investigate the impact of corporate asset restructuring and find that target leverage after restructuring is reduced for downsizing firms and increased for upsizing firms. Changes in target leverage are stabilized by the second year after the restructuring event and are monotonic relative to the degree of restructuring. Decomposition analysis shows that corporate asset restructuring directly and significantly affects target debt ratios. Compared to control firms, downsizing firms adjust claims by repurchasing debt while upsizing firms issue debt securities. As expected, debt repurchases are associated with lower tax liabilities while debt issuance decisions correspond to lower growth proxies and are consistent with a higher adverse selection cost of issuing equity, positive leverage deficit, higher tax liabilities, and lower bankruptcy risk. |
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