Asymmetric peer effects in capital structure dynamics

Management Analysis Journal

This study aims to analyze heterogeneity of speed of adjustment on basic industry, consumer goods, and misceleeneous companies. The population in this study uses basic industry, consumer goods, and miscellenoeus companies listed on the Indonesia Stock Exchange in 2009-2018 period. The method of determining the sample using a pusposive sampling technique based on criteries determined by researchers. We employ two-step partial adjustment model and use measure of book leverage and firm characteristic; profitability, size, tangibility, and growth which has an influence leverage target to estimate speed of adjustment. For three industries, there is evidence of heterogeneity of speef adjustment. The result showed that speed of adjustment 24% of basic industry, 37.1% of consumer goods, and 27.3% of miscellaneous industry.

Monetary Integration, Markets and Regulation, 2004

The common approach in empirical capital structure research has been to study the determinants of optimal leverage by studying the association between observed leverage and a set of explanatory variables. This approach has two major shortcomings. First, the observed leverage need not necessarily be the optimal leverage. Second, the empirical analyses, being effectively non-dynamic, are unable to shed any light on the nature of dynamic capital structure adjustment by firms. In this paper, we use a dynamic adjustment model, and panel data methodology on a sample of UK and US firms to specifically establish the determinants of a time-varying optimal capital structure. In addition, the model allows for the possibility that at any point in time firms' observed leverage may not be optimal, and that firms differ in their speed of adjustment towards the optimal capital structure, which itself may be changing over time for the same firm. We also attempt to identify factors determining the speed of adjustment. We find that firms typically have capital structures that are not at the target, and that they adjust very slowly towards the target.

The Quarterly Review of Economics and Finance, 2020

Capital structure studies of financial institutions have observed identical facts to those of non-financial corporations, especially in relation to capital structure adjustments (dynamic trade-off theory) and asymmetric information. This study examined data from 64 NYSE-listed financial corporations for 91 quarters through Johansen-Fisher panel cointegration model. The target capital structure was measured by the average D/E for the entire period and asymmetric information was measured by Corwin-Schultzś S 2. The results were controlled by traditional determinants of capital structure and indicated the existence of target capital structure for financial institutions, with deviations and corrections in relation to the target presenting long-term relationship with asymmetric information. The findings presented robustness with different measures of target capital structure and dynamic panel data methods. It is concluded by consistency with dynamic trade-off theory and anticipation of financing decisions of financial institutions through the computation of the measure of asymmetric information.

Asia-Pacific Journal of Financial Studies, 2014

Studies on the capital structure of Asian corporations are rare, and most of those studies support different explanations of financing decisions compared to the ones accepted for the USA and Europe. We test relationships that are typical of the Tradeoff Theory and the Pecking Order Theory, and analyze the speed of adjustment toward target capital structures for 1239 companies with capitalizations of more than US$1 billion listed on 11 Asian stock exchanges and belonging to eight industrial sectors. Our results are based on generalized method of moments (GMM) estimations for the determinants of capital structures and system-GMM estimations for the speed of adjustment, and robustness is checked using book leverage and market leverage on the basis of ordinary least squares estimations and two-stage least squares estimations. We contribute to the literature by finding strong evidence that companies in Asia pursue target capital structures, as predicted by the Tradeoff Theory. Only in one respect does the Pecking Order Theory demonstrate superior explanatory power. We further show that the convergence to target capital structures is consistent with international evidence, estimated at an annual adjustment speed of 24-45% of original leverage levels. Finally, our comparison among eight industries shows that the capital structure choice in Asia is influenced by fixed effects.

SSRN Electronic Journal, 2006

We use a dynamic framework and panel methodology to investigate the determinants of a time-varying corporate capital structure. Our sample comprises 706 European firms from France, Germany, Italy and the U.K. over the period from 1983 to 2002. If capital structure adjustment is costly, firms may deviate temporarily from their target debt ratios. Therefore, we investigate the adjustment process and analyze the impact of well-known firm characteristic variables on the speed of adjustment towards a endogenously specified target debt ratio. We find that larger and faster growing firms adjust their capital structure more readily. Furthermore, large deviations from target debt ratios lead to faster readjustment. Additionally, we shed new light on capital structure rebalancing arguments. We document that large swings in market values of leverage lead to readjustment in the corresponding book values of leverage in the following periods. Finally, we find that capital structure adjustments are largely determined by financial constraints, i.e., firms in unfavourable financial conditions show only little or no adjustment behavior at all.

RePEc: Research Papers in Economics, 2004

This paper studies the capital structure dynamics of central and eastern European firms to better understand the quantitative and qualitative development of financial systems in this region. The dynamic model used endogenises the target leverage as well as the adjustment speed towards these targets. It is applied to microeconomic data for 10 countries. We find that during the transition process firms generally increased their leverage, lowering the gap between actual and target leverage. Profitability and age of firms are the most robust determinants of their capital structure targets. Older firms attract more bank debt, whereas profitability decreases firms' leverage targets. While banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still important. As a result, firms prefer internal finance above bank debt (pecking order behaviour) and adjust leverage only slowly.

Economic Research-Ekonomska Istraživanja

This study examines the existence of the dynamism of capital structure in Pakistan for the period from 2003 to 2012, with specific objectives of estimating the adjustment speed and determining the factors affecting the adjustment speed towards target capital structure. Using difference Generalized Method of Moments (GMM) as the estimation technique, the study confirms the existence of optimal capital structure for Pakistani non-financial listed firms, and concludes that, depending upon the proxy of target debt used, firms make full adjustment towards optimal capital structure in 1.45 years to 2.25 years. Firms' size, profitability, stock market development, and GDP are found to be relatively consistent determinants of the adjustment speed across different proxies of debt. This study contributes in the existing literature of the capital structure by providing evidence regarding the existence of target capital structure, estimating the adjustment speed towards target capital structure, and identifies factors affecting adjustment speed towards target capital structure for Pakistan using four different measures of leverage.

Emerging economy studies, 2019

This paper considers the trade-off and pecking order theory in a unified framework and examines the influence of adverse selection costs on target adjustment process by investigating the relationship between firms' financing imbalance and their target adjustment speed. Using a large dataset of 2718 non-financial and non-utility listed firms over a period of 2004-2005 to 2015-2016, the study observes that Indian firms adjust toward target leverage with a moderate adjustment speed of 32-36 percent. Moreover, firms with above-target debt make faster adjustment than firms with below-target debt, and firms with financing deficit make faster adjustment than firms with financing surplus. The extensions of target adjustment model by considering financing imbalance and direction of deviation together, and also by incorporating extent of deviation further reveal that firms try to avoid equity and prefer to deal in debt while making adjustments toward the target. In fact, firms deal in equity only when they are highly deviated from target leverage. All these findings suggest that adverse selection costs play significant role in the adjustment process. Therefore, though capital structure decisions of Indian firms are guided by trade-off theory, significance of pecking order arguments cannot be negated. This study makes important contributions to the existing literature as prior studies on impact of financing imbalance on adjustment speed are based on US which is very much different from emerging economies, particularly India.

Using a new and comprehensive panel data set of stock market and accounting data for 650 publicly listed Chinese companies over the period of 1999-2004, we examine the determinants of the capital structure for publicly listed Chinese companies. In this examination, we take into account unique institutional structure of Chinese companies. We first estimate static panel-data models of the firms' capital structure with both unobserved cross-sectional and time effects as well as industry effects. Then we posit that a firm's decision on capital structure is inherently dynamic. We thus formulate a dynamic panel-data regression model and estimate it using dynamic panel-data generalized method of moments. Our results show that publicly listed Chinese firms adjust toward an equilibrium level of debt ratio in a given year but the adjustment process is very slow due arguably to the unique institutional structure in China. We also find that firm size, tangibility and ownership structu...

Applied Financial Economics, 2006

We use a dynamic adjustment model and panel methodology to investigate the determinants of a time-varying optimal capital structure. Because firms may temporarily deviate from their optimal capital structure in the presence of adjustment costs, we also endogenize the adjustment process. In partic ular, we ana lyze the effects of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target leverage. Our sample comprises a panel of 90 Swiss firms over the years 1991 to 2001. We find that faster growing firms and those that are further away from their optimal capital structure adjust more readily. Our results also reveal interesting interrelations between the adjustment speed and popular business cycle variables. For example, the speed of adjustment is higher when the term spread is higher, i.e., when economic prospects are good.