Leverage Behaviour in the G‐7 Countries and the Influence of Stock Returns

Ólafur Briem


The study addresses the capital structure readjustment process by comparing some theoretical predictions with statistical evidence from international data. Orthodox theories based on debt‐ratio mean reversion are challenged by testing the hypothesis of debt‐ratio target irrelevance and the proposition that institutional factors influence leverage behaviour. The results provide evidence for the dependence of market value debt‐ratio on stock returns in all the G‐7 countries. Ample corporate issuing is not used to counteract the effects of stock returns on capital structure. Firm specific characteristics supported by orthodox theories are found most applicable to the US, UK and Japan. The book‐value debt ratio shows relative dependence on past values, although this is found to be less the case in the Anglo‐American countries than in continental Europe. These results indicate that corporate management is not interested in market‐based debt‐ratio targets, book values may be of greater concern.


Capital structure; debt ratio; target adjustment; corporate governance.


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DOI: https://doi.org/10.24122/tve.a.2005.3.1.2


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Útgefendur eru Viðskiptadeild Háskólans á Bifröst, Viðskiptafræðideild og Hagfræðideild Háskóla Íslands, Viðskiptafræðideild Háskólans í Reykjavík og Seðlabanki Íslands.

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