Deviations from the Target Capital Structure of Financial Institutions
39 Pages Posted: 26 May 2014
Date Written: May 18, 2014
Using a large sample of U.S. financial institutions between 2000-2007, this paper documents that the distance from the target capital structure helps explain several capital structure adjustments. First, financial institutions which are either over-leveraged or under-capitalized with respect to their respective target are more likely to issue different securities which increase their financial flexibility. While both of these bank specific targets play an important role, the distance to the overall regulatory constraint further influences the banks' behavior. Second, this paper also provides evidence on the real effects which deviations from the target capital structure can have: The further under-capitalized banks are, the more they reduce the growth rate of customer loans and the more banks deviate from their leverage target, the more they increase their asset risk.
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