Financial flexibility and the persistence of extreme financial leverage policies: a new empirical approach

Ebrahimi, Tahera ORCID: https://orcid.org/0000-0003-3130-9759 and Al-Najjar, Basil ORCID: https://orcid.org/0000-0003-2753-7142 (2025) Financial flexibility and the persistence of extreme financial leverage policies: a new empirical approach. Financial Markets, Institutions and Instruments. ISSN 0963-8008

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Abstract

Firms might adopt capital structure policies which are far away from their optimal targets, this is known in the literature as extreme financing policies. Unlike previous empirical studies, our research sheds new light on the impact of financial flexibility (changes in credit ratings and over/underinvestment) on the duration of these policies. Using a large sample of US firms for the period from 1985 to 2017, we employ a novel empirical approach of multilevel survival model estimators for different subsamples of conservative and the aggressive debt policy users. The results show that, on average, the duration of extreme financing policies render the degree of urgency to shift toward firms' optimal leverage. Accordingly, firms adopting extreme financial policies are less keen to adjust quickly to their target debt ratios and such speed of adjustment varies between conservative and aggressive debt users. Our results provide interesting empirical implications for firms adopting conservative or aggressive debt policies.