Asymmetric Adjustment Toward Optimal Capital Structure: Evidence from a Crisis

55 Pages Posted: 22 Feb 2014

See all articles by Viet Anh Dang

Viet Anh Dang

Alliance Manchester Business School

Minjoo Kim

University of Liverpool - Accounting and Finance Division

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Date Written: December 14, 2013

Abstract

We employ dynamic threshold partial adjustment models to study the asymmetries in firms' adjustments toward their target leverage. Using a sample of US firms over the period 2002-2012, we document a negative impact of the Global Financial Crisis on the speed of leverage adjustment. In our subperiod analysis, we find moderate evidence of cross-sectional heterogeneity in this speed, which seems more pronounced pre-crisis and provides little support for the financial constraint view. Over the pre-crisis period, more constrained firms, such as those with high growth, with large investment, of small size, and with volatile earnings, adjust their capital structures more quickly than their less constrained counterparts. These firms rely heavily on external funds to offset large financing deficits, suggesting that their higher adjustment speeds may be driven by lower adjustment costs that are shared with the transaction costs of accessing external capital markets. During the crisis, the speed of adjustment varies with the deviation from target leverage: only firms with sufficiently large deviations attempt to revert to the target, albeit slowly. Overall, our results provide new evidence of both cross-sectional and time-varying asymmetries in capital structure adjustments, which is consistent with the trade-off theory.

Keywords: Capital Structure, Global Financial Crisis, Trade-off Theory, Partial Adjustment Model, Dynamic Panel Threshold Model.

JEL Classification: G30; G32; C33.

Suggested Citation

Dang, Viet Anh and Kim, Minjoo and Shin, Yongcheol, Asymmetric Adjustment Toward Optimal Capital Structure: Evidence from a Crisis (December 14, 2013). International Review of Financial Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2399451

Viet Anh Dang (Contact Author)

Alliance Manchester Business School ( email )

AMBS Crawford House
Booth Street West
Manchester, Greater Manchester M15 6PB
United Kingdom
+44(0)16127 50438 (Phone)

Minjoo Kim

University of Liverpool - Accounting and Finance Division ( email )

227 Grove
Management School
Liverpool, Liverpool L69 3BX
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/minjoo-kim/

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
218
Abstract Views
896
rank
141,164
PlumX Metrics