Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic...

We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other...