By Philip Bunn and Garry Young of the Bank's Domestic Finance Division.
Corporate debt levels in the United Kingdom are currently at an historically high level in relation to the market value of corporate capital. Empirical evidence discussed in this article suggests that this is unlikely to be an equilibrium position and that companies will continue to act so as to strengthen their balance sheets. Much of this adjustment is likely to occur through financial channels, such as reduced dividend payments or increased new equity issues, but it could also occur through more restrained capital investment. Illustrative simulations presented in the article suggest that adjustment tends to be gradual and that it may take several years for balance sheets to return to equilibrium.