Abstract

The market value of leverage is generally lower than the corresponding book leverage, displays pronounced time variation, and spikes during periods of financial market turmoil. More importantly, and contrary to book leverage, market leverage fluctuations exhibit a declining time trend following the Global Financial Crisis. These results owe to an estimation methodology that jointly uses timely information from equity and credit markets to generate a high frequency estimate of firm-level market leverage. Using our methodology, we develop a novel measure of financial soundness for the U.S. non-financial corporate sector that we use to track economic crises in real time.