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
Date Written: July 20, 2010
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: Suggested Citation