Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence From the U.S. ICT Sector

56 Pages Posted: 14 Apr 2019

See all articles by Giorgio Canarella

Giorgio Canarella

University of Nevada, Las Vegas

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: March 18, 2019

Abstract

We employ a dynamic adjustment model (Flannery and Rangan, 2006) to investigate the determinants of capital structure and speed of adjustment (Drobetz and Wanzenried, 2006) in a panel of 85 U.S. ICT firms over the years 1990 to 2013. We estimate the capital structure using a wide range of factors commonly used in the empirical literature (growth and investment opportunities, profitability, firm size, default risk, and industry median capital structure). We expand on this literature to include two additional determinants: asset turnover, an inverse measure of firm agency costs (Morellec, Nikolov, and Schurhoff, 2012; Ang, Cole, and Lin, 2000), and R&D activity (Aghion, Bond, Klemm, and Marinescu, 2004). We find that the speed of adjustment increases with firm size, growth opportunities, and distance from the target capital structure, and decreases with default risk and agency costs. We also find that R&D expenditures and agency costs cause firms to maintain lower levels of debt. We employ four recently developed estimators in dynamic panel-data econometrics: the double-censored fractional estimator (Elsas and Florysiak, 2011), the bias-corrected least-squares dummy-variable estimator (Bruno, 2005), the iterative bootstrap-based bias correction for the fixed-effects estimator (Everaert and Pozzi, 2007), and the fixed-effects quasi-maximum-likelihood estimator (Kripfganz, 2016; Hsiao, Pesaran, and Tahmiscioglu, 2002). In addition, our panel-data regression results show that in the ICT sector, the leverage ratio exhibits high persistence. Moreover, it positively relates to growth and investment opportunities, firm size, capital investment, and industry median capital structure, and negatively relates to profitability and default risk.

Keywords: ICT industry; agency costs; optimal capital structure, dynamic modeling

JEL Classification: G21, G28, G32, G34

Suggested Citation

Canarella, Giorgio and Miller, Stephen M., Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence From the U.S. ICT Sector (March 18, 2019). Available at SSRN: https://ssrn.com/abstract=3354975 or http://dx.doi.org/10.2139/ssrn.3354975

Giorgio Canarella

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154-6005
United States

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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