Asymmetric Capital Structure Adjustments: New Evidence from Dynamic Panel Threshold Models

37 Pages Posted: 5 Aug 2009 Last revised: 17 Apr 2012

See all articles by Viet Anh Dang

Viet Anh Dang

Alliance Manchester Business School

Minjoo Kim

University of Liverpool - Accounting and Finance Division

Yongcheol Shin

Independent

Date Written: March 17, 2012

Abstract

We develop a dynamic panel threshold model of capital structure to test the dynamic trade-off theory, allowing for asymmetries in firms’ adjustments toward target leverage. Our novel estimation approach is able to consistently estimate heterogeneous speeds of adjustment in different regimes as well as to properly test for the threshold effect. We consider several proxies for adjustment costs that affect the asymmetries in capital structure adjustments and find evidence that firms with large financing imbalance (or a deficit), large investment or low earnings volatility adjust faster than those with the opposite characteristics. Firms not only adjust at different rates but also seem to adjust toward heterogeneous leverage targets. Moreover, we document a consistent pattern that firms undertaking quick adjustment are over-levered with a financing deficit and rely heavily on equity issues to make such adjustment.

Keywords: Capital Structure, Target Leverage, Dynamic Trade-off Theory, Dynamic Panel Threshold Model.

JEL Classification: C12, C33, G32

Suggested Citation

Dang, Viet Anh and Kim, Minjoo and Shin, Yongcheol, Asymmetric Capital Structure Adjustments: New Evidence from Dynamic Panel Threshold Models (March 17, 2012). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1444488 or http://dx.doi.org/10.2139/ssrn.1444488

Viet Anh Dang (Contact Author)

Alliance Manchester Business School ( email )

AMBS Crawford House
Booth Street West
Manchester, Greater Manchester M15 6PB
United Kingdom
+44(0)16127 50438 (Phone)

Minjoo Kim

University of Liverpool - Accounting and Finance Division ( email )

227 Grove
Management School
Liverpool, Liverpool L69 3BX
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/minjoo-kim/

Yongcheol Shin

Independent

No Address Available

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