Heterogeneity in the Speed of Adjustment Toward Target Leverage

31 Pages Posted: 12 Jun 2011

See all articles by Ralf Elsas

Ralf Elsas

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

David Florysiak

University of Southern Denmark; Danish Finance Institute

Date Written: June 2011

Abstract

Estimating the speed of adjustment toward 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.

Suggested Citation

Elsas, Ralf and Florysiak, David, Heterogeneity in the Speed of Adjustment Toward Target Leverage (June 2011). International Review of Finance, Vol. 11, Issue 2, pp. 181-211, 2011. Available at SSRN: https://ssrn.com/abstract=1861766 or http://dx.doi.org/10.1111/j.1468-2443.2011.01130.x

Ralf Elsas (Contact Author)

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

Kaulbachstr. 45
Munich, DE 80539
Germany

David Florysiak

University of Southern Denmark ( email )

Campusvej 55
Odense, 5230
Denmark

Danish Finance Institute ( email )

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