Partial Adjustment Towards Target Capital Structure: Evidence from New Zealand

Abstract

We investigate whether industry differences influence how quickly New Zealand firms adjust towards target debt ratios between 1984 and 2009. We employ two-step and integrated partial adjustment models, and use measures of both book and market leverage. Our first significant finding is that different industries adjust towards target debt ratios at different speeds. For eight out of 15 industries there is evidence of an inverse relationship between levels of debt and speed of adjustment. We speculate that industry risk may be an underlying factor determining adjustment speed. Our second significant finding is that financial deficits influence the speed at which firms adjust towards a target debt ratio in particular industries. In seven industries, firms that do not have deficits adjust more quickly towards a target debt ratio than firms that do have deficits. In four industries, firms that do have deficits adjust more quickly.

Keywords: Capital structure, speed of adjustment

JEL Classification: G32