Market Imperfections, Macroeconomic Conditions, and Capital Structure Adjustments

58 Pages Posted: 20 Apr 2013

See all articles by Wei Wang

Wei Wang

Cleveland State University

Date Written: April 20, 2013


This paper investigates how capital structure dynamics depend on “systematic” adjustment costs proxied by market imperfections and macroeconomic conditions in a cross-country setting. We document substantial variations in firms’ capital structure adjustments across countries as well as over time. Consistent with adjustment costs impeding firms from rebalancing their capital structures, worse market imperfections are associated with slower speeds of adjustment (SOA) and larger leverage deviations. Intertemporally, capital structure adjustment is procyclical, with SOA increasing by 0.9 percentage point for every one-percentage-point increase in GDP growth. The procyclicality is attributable to good macroeconomic conditions mitigating market imperfections through channels of 1) facilitating free-ride restructuring, and 2) uncertainty alleviation. Our investigation features a bootstrapping-based estimation method that addresses the mechanical mean reversion of leverage ratio.

Keywords: Capital structure, speed of adjustment (SOA), adjustment costs, macroeconomic conditions, procyclicality, mechanical mean reversion

JEL Classification: G30, G32

Suggested Citation

Wang, Wei, Market Imperfections, Macroeconomic Conditions, and Capital Structure Adjustments (April 20, 2013). Available at SSRN: or

Wei Wang (Contact Author)

Cleveland State University ( email )

Cleveland, OH 44115
United States

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