Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/50004 
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dc.contributor.authorHess, Dieteren
dc.contributor.authorImmenkötter, Philippen
dc.date.accessioned2011-09-05-
dc.date.accessioned2011-09-29T15:48:00Z-
dc.date.available2011-09-29T15:48:00Z-
dc.date.issued2011-
dc.identifier.urihttp://hdl.handle.net/10419/50004-
dc.description.abstractWe study the effect of the business cycle on optimal capital structure choice and the benefit to leverage. We propose a regime switching model with a state-dependent cash flow process to capture macroeconomic risk in a firm's cash flow. Our model is parsimonious but still realistic and allows for a wide range of analysis. We find pro-cyclical optimal leverage ratios, benefits to leverage, and costs of operating at a non-optimal leverage. If macroeconomic risk decreases, i.e. earnings become more stable and growth rates less volatile, optimal leverage and its benefits increase due to lower default risk. The regime switching property of EBIT traces observed EBIT paths closely and is applicable to a wide range of corporate valuation models. Our model offers novel empirically testable implications, such as higher tax benefits after the change in macroeconomic risk since the late 1980s and common capital structure adjustments in recessions and around turning points.en
dc.language.isoengen
dc.publisher|aUniversity of Cologne, Centre for Financial Research (CFR) |cCologneen
dc.relation.ispartofseries|aCFR working paper |x11-12en
dc.subject.jelE44en
dc.subject.jelG12en
dc.subject.jelG32en
dc.subject.ddc330en
dc.subject.keywordcapital structureen
dc.subject.keywordmacroeconomic risken
dc.subject.keywordregime switchingen
dc.subject.keywordbenefit to leverageen
dc.titleOptimal leverage, its benefits, and the business cycle-
dc.typeWorking Paperen
dc.identifier.ppn667703829en
dc.rightshttp://www.econstor.eu/dspace/Nutzungsbedingungenen
dc.identifier.repecRePEc:zbw:cfrwps:1112en

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