Credit lines and leverage adjustments

Article history: Received 11 June 2012 Received in revised form 19 December 2013 Accepted 20 December 2013 Available online 28 December 2013 Adjustment costs play a prominent role in explanations of capital structure, but the extent of their economic importance is unknown. A credit line has institutional features important for this analysis, notably its sunk costs of access to the debt market, its revolving nature, and its covenant-sourced contingent nature. I find that the credit line is associated with crosssectional variation in estimated speeds of adjustment to target leverage in patterns consistent with the importance of adjustment costs, and with the importance of maintaining financial flexibility for liquidity and investment needs. © 2013 Elsevier B.V. All rights reserved. JEL classification: G30 G32