Heterogeneity in the Speed of Capital Structure Adjustment Across Countries and Over the Business Cycle

38 Pages Posted: 19 May 2020

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Dirk Schilling

University of Applied Sciences Worms

Henning Schröder

University of Hamburg - Hamburg Business School; Hamburg Financial Research Center

Date Written: November 2015

Abstract

This study analyses the heterogeneity in the speed of capital structure adjustment. Using a doubly‐censored Tobit estimator that accounts for mechanical mean reversion in leverage ratios, the speed of adjustment is 25% per year in a large international sample, supporting the economic relevance of the trade‐off theory. Differences in the adjustment speed across financial systems are attributable to differences in the costs of adjustment. Macroeconomic and micro‐level supply‐side constraints also affect the dynamics of leverage. Firms adjust more slowly during recessions, and the business cycle effect on adjustment speed is most pronounced for financially constrained firms in market‐based countries.

Keywords: capital structure, speed of adjustment, institutional arrangements, business cycle, dynamic panel methods

Suggested Citation

Drobetz, Wolfgang and Schilling, Dirk and Schröder, Henning, Heterogeneity in the Speed of Capital Structure Adjustment Across Countries and Over the Business Cycle (November 2015). European Financial Management, Vol. 21, Issue 5, pp. 936-973, 2015, Available at SSRN: https://ssrn.com/abstract=3600254 or http://dx.doi.org/10.1111/eufm.12048

Wolfgang Drobetz (Contact Author)

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Dirk Schilling

University of Applied Sciences Worms ( email )

Erenburgerstrasse 19
Worms, 67549
Germany

HOME PAGE: http://www.hs-worms.de

Henning Schröder

University of Hamburg - Hamburg Business School ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Hamburg Financial Research Center ( email )

c/o University of Hamburg
Moorweidenstr. 18
Hamburg, 20148
Germany

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