Adjustment Cost Determinants and Target Capital Structure
39 Pages Posted: 12 Mar 2016
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: Suggested Citation