The Dynamic Adjustment Towards Target Capital Structures of Firms in Transition Economies

37 Pages Posted: 8 May 2006

See all articles by Ralph De Haas

Ralph De Haas

European Bank for Reconstruction and Development; Tilburg University - Department of Finance

Marga Peeters

De Nederlandsche Bank

Abstract

We examine the capital structure dynamics of Central and Eastern European firms to get a better understanding of the quantitative and qualitative development of the financial systems in this region. The dynamic model used endogenizes the target leverage as well as the adjustment speed. It is applied to microeconomic data for ten countries. We find that during the transition process, firms generally increased their leverage, lowering the gap between the actual and the target leverage. Profitability and age are the most robust determinants of capital structure targets. Although banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still relatively large. As a result, firms prefer internal finance above bank debt and adjust leverage only slowly.

Suggested Citation

De Haas, Ralph and Peeters, Marga, The Dynamic Adjustment Towards Target Capital Structures of Firms in Transition Economies. Economics of Transition, Vol. 14, No. 1, pp. 133-169, January 2006. Available at SSRN: https://ssrn.com/abstract=878806 or http://dx.doi.org/10.1111/j.1468-0351.2006.00237.x

Ralph De Haas (Contact Author)

European Bank for Reconstruction and Development ( email )

One Exchange Square
London, EC2A 2JN
United Kingdom

HOME PAGE: www.ebrd.com

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Marga Peeters

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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