Adjustment Cost Determinants and Target Capital Structure
University of Warwick - Finance Group
University of Piraeus - Department of Banking and Financial Management
November 7, 2013
Dynamic trade-off models of capital structure predict negative correlation between adjustment speed and adjustment costs. This paper empirically tests this prediction. Our approach brings together elements from two strands of the literature: dynamic capital structure and security offerings literature. In contrast to existing studies, our approach employs directly measurable proxies for adjustment costs (security issuance cost) determinants. We 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: G32working papers series
Date posted: June 27, 2012 ; Last revised: February 27, 2014
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