How and When Do Firms Adjust Their Capital Structures Toward Targets?
44 Pages Posted: 20 Jan 2005 Last revised: 10 Mar 2014
If firms adjust their capital structures toward targets, and if there are adverse selection costs associated with asymmetric information, how and when do firms adjust their capital structures? We suggest a financing-needs-induced adjustment framework to examine the dynamic process by which firms adjust their capital structures. We find that most adjustments occur when firms have above-target debt with a financial surplus or when they have below-target debt with a financial deficit. These results suggest that firms move toward the target capital structure when they face a financial deficit/surplus --- but not in the manner hypothesized by the traditional pecking-order theory.
Keywords: capital structure, tradeoff theory, adjustment costs
JEL Classification: G32, G35
Suggested Citation: Suggested Citation