Firm Characteristics, Economic Conditions and Capital Structure Adjustments

38 Pages Posted: 14 Aug 2006

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Pascal Pensa

University of Basel - Department of Finance

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ)

Date Written: January 2007

Abstract

We use a dynamic framework and panel methodology to investigate the determinants of a firms' time-varying capital structure. Our sample comprises 706 European firms from France, Germany, Italy and the U.K. over the period from 1983 to 2002. If capital structure adjustment is costly, firms may deviate temporarily from their target debt ratios. Therefore, we endogenize the adjustment process and analyze the impact of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment towards target leverage. We find that larger and faster growing firms as well as firms that are further away from their targets adjust more readily. Additionally, we document interesting relations between well-known business cycle variables and the adjustment speed. In a nutshell, firms adjust faster in favorable macroeconomic conditions, e.g., if interest rates are low and the risk of disruptions in the global financial system are negligible. We also document that capital structure decision are largely determined by financial constraints. Finally, we shed new light on the interdependence between book value based and market value based measures of leverage as well as on capital structure rebalancing issues.

Keywords: Capital Structure, dynamic analysis, panel data

JEL Classification: G32, C61, C23

Suggested Citation

Drobetz, Wolfgang and Pensa, Pascal and Wanzenried, Gabrielle, Firm Characteristics, Economic Conditions and Capital Structure Adjustments (January 2007). Available at SSRN: https://ssrn.com/abstract=924179 or http://dx.doi.org/10.2139/ssrn.924179

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Pascal Pensa (Contact Author)

University of Basel - Department of Finance ( email )

Holbeinstrasse 12
Basel, CH-4051
Switzerland
+41612673318 (Phone)
+41612670898 (Fax)

HOME PAGE: http://www.wwz.unibas.ch/finance/team/pensa/

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ) ( email )

Zug, CH-6304
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
720
Abstract Views
2,851
rank
35,855
PlumX Metrics