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The dynamic adjustment towards target capital structures of firms in transition economies

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  • Ralph de Haas
  • Marga Peeters

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

  • Ralph de Haas & Marga Peeters, 2006. "The dynamic adjustment towards target capital structures of firms in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 133-169, March.
    • Handle: RePEc:bla:etrans:v:14:y:2006:i:1:p:133-169
    DOI: 10.1111/j.1468-0351.2006.00237.x
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