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Capital structure adjustment in Latin American firms: An empirical test based on the Error Correction Model

Author

Listed:
  • Jorge A. Munoz Mendoza
  • Carlos L. Delgado Fuentealba
  • Carmen L. Veloso Ramos
  • Sandra M. Sepúlveda Yelpo
  • Edinson E. Cornejo Saavedra
  • Diego A. Erices Olivera

Abstract

The objective of this article is to analyze the capital structure adjustment of Latin American firms through the pecking order and trade-off theories using a sample of 975 non-financial firms for the period 2000-2017. The results support the existence of a target capital structure. Adjustment speeds ranged between 48.9% and 74.3% and generate a rapid convergence of leverage towards its target level. Financial deficits explained less than half of the changes in debt, which contradicts the pecking order theory. The results of the error correction model indicated that companies dynamically deviate from their long-term capital structure. The convergence speeds in the partial adjustment model increased up to 69.5% and 91.7% with the error correction method. These results are relevant for firms and investors.

Suggested Citation

  • Jorge A. Munoz Mendoza & Carlos L. Delgado Fuentealba & Carmen L. Veloso Ramos & Sandra M. Sepúlveda Yelpo & Edinson E. Cornejo Saavedra & Diego A. Erices Olivera, 2023. "Capital structure adjustment in Latin American firms: An empirical test based on the Error Correction Model," Estudios Gerenciales, Universidad Icesi, vol. 39(166), pages 50-66, March.
    • Handle: RePEc:col:000129:020674
    DOI: 10.18046/j.estger.2023.166.5432
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    References listed on IDEAS

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    More about this item

    Keywords

    pecking order; trade-off; capital structure; adjustment; leverage;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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