Cash flows and leverage adjustments

Michael Faulkender, Mark J. Flannery, Kristine Watson Hankins, Jason M. Smith

Research output: Contribution to journalArticlepeer-review

307 Scopus citations


Recent research has emphasized the impact of transaction costs on firm leverage adjustments. We recognize that cashflow realizations can provide opportunities to adjust leverage at relatively low marginal cost. We find that a firm's cashflow features affect not only the leverage target, but also the speed of adjustment toward that target. Heterogeneity in adjustment speeds is driven by an economically meaningful concept: adjustment costs. Accounting for this fact produces adjustment speeds that are significantly faster than previously estimated in the literature. We also analyze how both financial constraints and market timing variables affect adjustments toward a leverage target.

Original languageEnglish
Pages (from-to)632-646
Number of pages15
JournalJournal of Financial Economics
Issue number3
StatePublished - Mar 2012


  • Adjustment costs
  • G32
  • Leverage
  • Speed of adjustment
  • Target

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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