Adjustment Cost Determinants and Target Capital Structure

39 Pages Posted: 12 Mar 2016

See all articles by Costas Lambrinoudakis

Costas Lambrinoudakis

University of Leeds - Faculty of Business

Date Written: March 11, 2016


Dynamic trade-off models of capital structure predict negative correlation between adjustment speed and adjustment costs. This paper empirically tests this prediction by bringing together elements from two strands of the literature: dynamic capital structure and security offerings literature. In contrast to existing studies, this approach employs directly measurable proxies for adjustment cost (security issuance cost) determinants. The correlation between adjustment costs and the speed of adjustment is found to be positive or zero. From a dynamic trade-off perspective, these results are puzzling as they suggest that transaction costs cannot explain the observed pattern of the capital structure adjustment process.

Keywords: capital structure; target leverage; adjustment speed; security issuance costs

JEL Classification: G30, G32

Suggested Citation

Lambrinoudakis, Costas, Adjustment Cost Determinants and Target Capital Structure (March 11, 2016). Multinational Finance Journal, Vol. 20, No. 1, p. 1-39, 2016, Available at SSRN:

Costas Lambrinoudakis (Contact Author)

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

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