Mechanical mean reversion of leverage ratios

descriptionPublicationkeyboard_double_arrow_right Article 01 May 2007 English Publisher:Elsevier BVJournal:Economics Letters, volume 95, pages 223-229 (issn: 0165-1765,

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Authors: Long Chen; Xinlei Zhao;

doi: 10.1016/j.econlet.2006.10.008

Mechanical mean reversion of leverage ratios

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Abstract

Abstract The leverage ratio of an average firm reverts to mean mechanically regardless of whether target leverage exists. This cautions against studies that use the ability of the leverage ratio (or deviation from target leverage) to predict future leverage changes to draw inference on capital structure theories.

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