This paper provides empirical evidence that lumpy investment projects provide firms with the opportunity to adjust leverage at low marginal cost. Consistent with a theoretical model, I find that 1) firms sequence equity before debt during the financing period of their investment projects, and 2)...

Using newly available data on hedge fund leverage that specifies the type of leverage employed (e.g. gross or net), we examine the potential for a credit spiral and financial fragility in hedge funds. We find that funds belonging to fund families that are highly levered, have multiple prime...

Prior research finds a weak relation between cash-flow volatility and leverage. Using a novel measure of cash-flow volatility, we find that volatility matters more for firms that are financially constrained. Constrained firms issue debt when volatility is low, but have trouble deleveraging in...

Priority spreading refers to the practice of firms increasing their reliance on secured and subordinated debt and reducing their reliance on senior debt as their credit quality deteriorates. We argue that priority spreading occurs, in part, because security provides creditors with greater...

We examine changes in debt structure when firms experience financial distress. At these points in time, firms refinance and undergo substantial changes in priority structure. Specifically, we find that firms di- versify their priority structure relative to its pre-distress composition. We show,...