NBER Working Paper No. 22828
Proactive deleveraging from all-time peak market leverage (ML) to near-zero ML and negative net debt is the norm among 4,476 nonfinancial firms with five or more years of post-peak data. ML is 0.543 at the historical peak and 0.026 at the later trough for the median firm in this sample, with a six-year median time from peak to trough. These deleveraging episodes are largely proactive, with debt repayment and earnings retention accounting for 93.7% of the peak-to-trough decline in ML for the median firm. Attenuated deleveraging, with ML staying well above zero, is the norm at 3,118 firms that are delisted due to financial distress within four years of peak. Leverage is path dependent, with the key to explaining whether ML is high or low at the post-peak trough being how high it was at the peak and prior trough and whether the firm has had only a short time to deleverage, e.g., due to distress-related delisting. The findings are consistent with proactive deleveraging to avoid distress and to restore financial flexibility, and are hard to reconcile with materially positive target leverage ratios.
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Document Object Identifier (DOI): 10.3386/w22828
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