Is the Partial Adjustment Model a Useful Tool for Capital Structure Research?

Review of Finance, Forthcoming

Posted: 21 Jul 2010 Last revised: 27 Jul 2010

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Guangzhong Li

Sun Yat-Sen Business School, Sun Yat-Sen University

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2010

Abstract

Recent research has focused on the estimates of the speed of adjustment to target leverage as the indicators of the importance of dynamic trade-off behavior. We show that the observed corporate financing behavior and the resulting dynamics of corporate debt ratios are such that the speed of adjustment is not an economically meaningful measure of the importance of target debt ratios. We conclude that partial adjustment regressions that rely on the existence of a well-defined target debt ratio are ill-suited for quantifying the importance of dynamic trade-off behavior vis-a-vis alternative theories.

Note: Previously titled "DO FIRMS HAVE UNIQUE TARGET DEBT RATIOS TO WHICH THEY ADJUST?"

Keywords: target capital structure, target leverage, target adjustment, partial adjustment, speed of adjustment

JEL Classification: G30, G32

Suggested Citation

Hovakimian, Armen and Li, Guangzhong, Is the Partial Adjustment Model a Useful Tool for Capital Structure Research? (July 20, 2010). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1645918

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Guangzhong Li (Contact Author)

Sun Yat-Sen Business School, Sun Yat-Sen University ( email )

135 Xingang Xi Road
Guangzhou, Guangdong 510275
China

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