Description:
We explore the impact of equity liquidity, leverage deviation and target instability on a firm’s dynamic leverage adjustments in the UK market by using a large sample of daily data over the period from 1996 to 2016. Our analyses document that the firm’s equity liquidity has a positive impact on the speed of adjustment (SOA) of its leverage ratio back to the target ratio in UK market. We also demonstrate that the positive relationship between liquidity and SOA is more pronounced for firms whose current position is relatively close to its target leverage ratio and whose target ratio is relatively stable. The results, which are robust to a battery of robustness checks, provide a new insight into the determinants of the SOA