Optimal corporate leverage and speculative cycles: an empirical estimation

Abstract

This paper develops an empirical model of corporate capital structure, optimal debt, and overleveraging, covering approximately two decades since 2000 across six leading industries: technology, financial, pharmaceutical, auto, airline, and energy. Estimated for each firm (total of 89), the model allows to infer an industry-specific default risk, measuring overleveraging as the difference between actual and optimal debt. The calculated corporate excess debt has largely been moving up, spiking around the global financial crisis and continuing into recovery more recently. The trend is consistent with an increase in the actual debt, with varying average excess debt ratios by sector. These results are informative for more applied ongoing and future outlook studies assessing a range of macroeconomic scenarios. The results also seem to conform to the general Kaleckian–Minskyan analytical framework, suggesting a possibility of endogenously rising speculative borrowing cycles.