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Valuing the speed of adjustment of capital structure

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  • Brian Clark

Abstract

I estimate the optimal speed of adjustment (SOA) policy for a large sample of US firms by examining the dynamics of the opportunity cost of leverage. Studying the dynamics of the opportunity cost of leverage as opposed to leverage ratios allows me to estimate the value of a given SOA policy and hence calibrate the optimal SOA policy in terms of firm value. Simulation results show that the optimal SOA is between 31% and 37% when adjustment costs are considered. The sensitivity of firm value to SOA is low for a wide range of SOAs around the optimal level. However, extremely high or low SOAs have substantial negative impacts on firm value.

Suggested Citation

  • Brian Clark, 2022. "Valuing the speed of adjustment of capital structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(4), pages 855-879, December.
    • Handle: RePEc:bla:jfnres:v:45:y:2022:i:4:p:855-879
    DOI: 10.1111/jfir.12300
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    References listed on IDEAS

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