Capital Structure Rebalancing: Industry Leverage and Financial Slack

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Anderson Luis Saber Campos
Wilson Toshiro Nakamura


We assume a model in which a firm's indebtedness is strongly influenced by a fund's supply side because creditors and investors (users of CAPM and market multiples) assess their exposure and risk level at relative bases (similar companies). This behavior induces firms' capital structure targets towards the industry debt median, so managers can just manage capital structure around this value (financial slack). We investigated the role of financial slack, assessed as a measure of relative indebtedness, and industry debt in capital structure rebalancing. We used an initial sample of 32,309 US firm-year observations to estimate the industry median of 64 industries and a subsample of 5,380 observations in 58 industries used to construct a balanced panel for a period of 20 years. The results of the dynamic panel for book leverage indicate that a company's indebtedness tends to follow industry indebtedness, but tends to reverse its trend in a period of two years. Reversion rate is associated with financial slack, i.e., companies farthest from the median debt in an industry converge faster.


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How to Cite
Campos, A. L. S., & Nakamura, W. T. (1). Capital Structure Rebalancing: Industry Leverage and Financial Slack. Journal of Contemporary Administration, 19(spe1), 20-37.