Optimal Capital Structure and Speed of Adjustment: Inside Debt Perspective

40 Pages Posted: 12 Feb 2016

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Tsung-Kang Chen

National Chiao Tung University

Yi-Han Chang


Date Written: February 10, 2016


This study examines the effects of inside debts on a firm's target leverage and explains the low-leverage puzzle (e.g. Graham, 2000) by the over estimation of the target leverage due to neglecting the effects of inside debts. We find that a firm's inside debt affects not only the target leverage, but also the speed of adjustment toward that target. A firm’s target leverage is negatively related to the amount of inside debt and the effect of inside debt is alleviated when a firm's funding status is positive. Additionally, the adjustment speeds are faster when considering inside debt effects during 1985-2012 and 2007-2012. If we separated the whole sample firms into below- and above-traditional target leverage, we find that adjustment speeds are slower (faster) when firms have below-target (above-target) leverage after 2007.

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang and Chang, Yi-Han, Optimal Capital Structure and Speed of Adjustment: Inside Debt Perspective (February 10, 2016). Asian Finance Association (AsianFA) 2016 Conference, Available at SSRN: https://ssrn.com/abstract=2730719 or http://dx.doi.org/10.2139/ssrn.2730719

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300

Yi-Han Chang

Independent ( email )

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