Is firm leverage target adjustment mechanically determined by other financial behaviours?

This paper discusses how other financial behaviours (investment, cash holdings, equity issuance and profitability) influence leverage decisions and evaluates whether leverage target adjustment is mechanically determined. We extend the classical partial adjustment model by using interaction terms to capture the mechanical effects. We find that the aforementioned financial behaviours constitute 45% of leverage target adjustments. There is also a substantial fraction of the reversion showing active adjustments. The active adjustment is faster from below the leverage target than from above. It appears that firms consider both the optimal leverage ratio and balancing their budget constraints when making financing decisions.