Leverage and Capital Utilization

Download or read book Leverage and Capital Utilization written by Diogo Duarte and published by . This book was released on 2019 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our paper documents procyclical behavior between capital utilization and short-term debt. This strong positive relationship persists even when we control the regressions for firm size, profits, and growth, attesting to the robustness of our findings. In addition, our analysis of the time series and panel data shows that the relationship is present at both the aggregate and firm levels. Based on this empirical finding, we develop a DSGE model that sheds light on the role of capital utilization in propagating real and financial shocks to financial assets. We show that in the presence of capital utilization, positive real and financial shocks cause the firm to change its financing of the equity payout policy from earnings to debt, resulting in an increase in short-term debt. Therefore, ignoring the firm's optimal decision on capital utilization may lead to misleading conclusions on how leverage is undertaken.