Heterogeneity in the Speed of Adjustment Towards Target Leverage

48 Pages Posted: 26 Mar 2011

See all articles by David Florysiak

David Florysiak

University of Southern Denmark; Danish Finance Institute

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: March 21, 2011

Abstract

Estimating the speed of adjustment towards target leverage using the standard partial adjustment model assumes that all firms within the sample adjust at the same (average) pace. Dynamic capital structure theory predicts heterogeneity in adjustment speed due to firm-specific adjustment costs. Applying an estimator designed to be unbiased in the context of unbalanced dynamic panel data with a fractional dependent variable (DPF estimator), we conduct an extensive analysis of cross-sectional heterogeneity in the speed of adjustment of firms. We find evidence for pronounced heterogeneity, where speed of adjustment is the highest for firms with high default risk or expected bankruptcy costs, and if opportunity costs of deviating from a target are high. Our evidence is consistent with the general relevance of the trade-off theory.

Keywords: Capital structure, partial adjustment models, speed of adjustment, fractional dependent variables, cross-sectional heterogeneity

JEL Classification: C23, C34, G24, G32, L60

Suggested Citation

Florysiak, David and Elsas, Ralf, Heterogeneity in the Speed of Adjustment Towards Target Leverage (March 21, 2011). Available at SSRN: https://ssrn.com/abstract=1791595 or http://dx.doi.org/10.2139/ssrn.1791595

David Florysiak (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense, 5230
Denmark

Danish Finance Institute ( email )

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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