This paper is a study of the financing actions by firms to adjust leverage: debt reductions, stock sales, debt issues, and stock purchases. Each type of action is positively autocorrelated. The standard empirical models of corporate leverage produce leverage targets that do not correctly predict...

The inverse relation between leverage and profitability is widely regarded as a serious defect of the tradeoff theory. We show that the defect is not with the theory but with the use of a leverage ratio in which profitability affects both the numerator and the denominator. Profitability directly...