Capital Structure Choice and the Costs of Adjustment to Target: New Evidence from Jordanian Panel Data

Abstract

Unlike previous empirical studies of capital structure, which are mainly restricted to the United States and other developed countries, this paper investigates capital structure decisions in developing countries through studying Jordanian non-financial firms. The paper finds that the capital structure choice in developing countries is influenced by factors namely, institutional ownership, profitability, business risk, asset tangibility, asset liquidity, market-to-book, and firm size. The findings are similar to these relating to developed countries. In addition, there is evidence that Jordanian firms have a target capital structure and that they adjust relatively quickly to their target leverage ratios. This indicates that the disequilibrium costs and the adjustment costs are equally important.

Keywords: Capital structure, target, determinants, panel data, partial adjustment model