Heterogeneous Speeds of Adjustment in Target Capital Structure

36 Pages Posted: 19 Mar 2012 Last revised: 26 Apr 2012

Kose John

New York University (NYU) - Department of Finance

Tae-Nyun Kim

The College of New Jersey

Darius Palia

Rutgers Business School; Center for Contract & Economic Organization

Date Written: March 15, 2012

Abstract

This paper finds strong support for the argument that heterogeneous adjustment costs significantly affects the speed with which a firm approaches its target capital structure. We find that firms with higher non-debt tax shields (from R&D), and cash holdings adjust faster to their target capital structure. Firms that have higher profitability, growth, information intensity, industry leverage, financial constraints, and market timing adjust slower to their target capital structure. We also find a significantly positive relation on predicted cash holdings, consistent with the argument that these firms adjust slowly because they have other predictable needs. On the other hand, firms with a lot of excess cash holdings adjust faster to their target capital structure. All the above results use an estimator that we show to be unbiased.

Keywords: target capital structure, speed of adjustment

JEL Classification: G23, G30, G32

Suggested Citation

John, Kose and Kim, Tae-Nyun and Palia, Darius, Heterogeneous Speeds of Adjustment in Target Capital Structure (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024357 or http://dx.doi.org/10.2139/ssrn.2024357

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Tae-Nyun Kim

The College of New Jersey ( email )

Ewing, NJ 08628-0718
United States

Darius Palia

Rutgers Business School ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Center for Contract & Economic Organization ( email )

435 W 116th St.
New York, NY 10027
United States

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