Meaningful Adjustments in a Financing Based Model of Capital Structure

42 Pages Posted: 18 Jun 2013 Last revised: 15 Apr 2016

See all articles by Neal Maroney

Neal Maroney

University of New Orleans - College of Business Administration

Wei Wang

Cleveland State University

Date Written: February 20, 2016

Abstract

The conventional partial adjustment model, focusing on leverage evolution, has difficulty identifying deliberate capital structure adjustments as financing decisions are confounded with the mechanical autocorrelation of leverage. We propose and estimate a financing-based partial adjustment model that separates the effects of financing decisions on leverage evolution from mechanical evolution. The speed of adjustment (SOA) is firm specific and stochastic, and active targeting of capital structure has a multiplier effect that depends on the size of financial deficit. Overall, expected SOA from active rebalancing (30%) more than doubles what is expected from mechanical mean reversion alone (13%).

Keywords: capital structure, trade-off theory, partial adjustment model, targeting, random financing, speed of adjustment

JEL Classification: G30, G32

Suggested Citation

Maroney, Neal and Wang, Wei, Meaningful Adjustments in a Financing Based Model of Capital Structure (February 20, 2016). Available at SSRN: https://ssrn.com/abstract=2280658 or http://dx.doi.org/10.2139/ssrn.2280658

Neal Maroney (Contact Author)

University of New Orleans - College of Business Administration ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Wei Wang

Cleveland State University ( email )

Cleveland, OH 44115
United States

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