The market vs book leverage ratio dilemma : an analysis of the lead-lag relationship and speed of adjustment
Abstrakt
In this study we explore the relationship between market and book leverage. The results obtained suggest that book- and market-based values of leverage are closely related.
The average difference in market and book values of leverage fluctuates around zero with recession sensitive firms being largely responsible for the observed volatility. The close relationship between book and market leverage supports the idea of the book leverage being managed to meet the market expectations.
We find that managers adjust book leverage only when it exceeds the market leverage. This behavior is consistent with a conservative view on managing leverage ratios as managers de-leverage firms when a one-sided discrepancy exists.
The estimated adjustment speed is significantly higher for firms sensitive to the business cycle, which are more sensitive to negative macro shocks. Keywords: market leverage, book leverage, adjustment speed, business