Adjustment Cost Determinants and Target Capital Structure
University of Piraeus - Department of Banking and Financial Management
November 10, 2014
Dynamic trade-off models of capital structure predict negative correlation between adjustment speed and adjustment costs. This paper empirically tests this prediction. My approach brings together elements from two strands of the literature: dynamic capital structure and security offerings literature. In contrast to existing studies, my approach employs directly measurable proxies for adjustment costs (security issuance cost) determinants. I find that the correlation between adjustment costs and the speed of adjustment is positive or zero. From a dynamic trade-off perspective, these results are puzzling as they suggest that transaction costs cannot explain the observed pattern of the capital structure adjustment process.
Number of Pages in PDF File: 68
Keywords: capital structure, target leverage, adjustment speed, security issuance costs
JEL Classification: G32
Date posted: June 27, 2012 ; Last revised: November 11, 2014
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