Market Imperfections, Macroeconomic Conditions, and Capital Structure Dynamics: A Cross-Country Study

53 Pages Posted: 29 Jun 2018

See all articles by Moonsoo Kang

Moonsoo Kang

CUNY Brooklyn College

Wei Wang

Cleveland State University

Ying Xiao

University of Colorado at Boulder - Department of Finance

Date Written: January 1, 2018

Abstract

This article investigates how “systematic” adjustment costs proxied by market imperfections, and macroeconomic conditions affect capital structure dynamics in a cross-country setting. We document substantial variations in firms’ capital structure adjustments across countries and, particularly, over time. Consistent with adjustment costs impeding firms from rebalancing their capital structures, worse market imperfections are associated with slower speeds of adjustment (SOA) and larger leverage deviations. Intertemporally, capital structure adjustment is procyclical, with SOA increasing by 0.9 percentage point for a one-percentage-point increase in GDP growth rate. The procyclicality is attributable to good macroeconomic conditions mitigating market imperfections through channels of 1) facilitating free-ride restructuring and 2) uncertainty alleviation. Our investigation features a bootstrapping-based estimation method that addresses the mechanical mean reversion of leverage ratio.

Keywords: adjustment costs, capital structure, macroeconomic conditions, market imperfections, mechanical mean reversion, procyclicality, speed of adjustment

JEL Classification: G30, G32

Suggested Citation

Kang, Moonsoo and Wang, Wei and Xiao, Ying, Market Imperfections, Macroeconomic Conditions, and Capital Structure Dynamics: A Cross-Country Study (January 1, 2018). Emerging Markets Finance and Trade, Vol. 54, No. 1, 2018. Available at SSRN: https://ssrn.com/abstract=3179809

Moonsoo Kang

CUNY Brooklyn College ( email )

2900 Bedford Avenue
Brooklyn, NY 11210
United States

Wei Wang (Contact Author)

Cleveland State University ( email )

Cleveland, OH 44115
United States

Ying Xiao

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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