Optimal Corporate Leverage and Speculative Cycles : An Empirical Estimation

This paper develops an empirical model of corporate capital structure and overleveraging. Motivated by the Stein (2012) model for optimal debt this paper extends the analysis into the corporate sector for a sample of 89 corporations across six leading industries: technology, financial, pharmaceutical, auto, airline and energy. Calculated for each firm, the model allows to infer an industry specific default risk measuring overleveraging as the difference between actual and optimal debt. The results from the above estimations suggest that the estimated corporate excess debt has largely been moving up, spiking around the crisis period, i.e., the global financial crisis and then continuing into recovery. This trend is consistent with an increase in the actual debt across industries, though the average excess debt ratios vary by sector. These results are informative for more applied future outlook studies assessing the pandemic scenarios