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In search of conclusive evidence: How to test for adjustment to target capital structure

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  • Hovakimian, Armen
  • Li, Guangzhong

Abstract

Simulation experiments show that both partial-adjustment and debt-equity choice models can generate spuriously significant estimates that are consistent with the hypothesis that firms have target debt ratios to which they periodically adjust. Regressions relying on full-sample fixed effects models of target leverage, in particular, produce results severely biased in favor of the target-adjustment hypothesis. Various target proxies and modifications to the standard methodologies are examined to identify partial-adjustment and debt-equity choice models that have power to reject the target-adjustment hypothesis. The resulting estimates of the speed of adjustment are in the range of five-eight percent per year.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 1 (February)
Pages: 33-44

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Handle: RePEc:eee:corfin:v:17:y:2011:i:1:p:33-44

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Web page: http://www.elsevier.com/locate/jcorpfin

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Keywords: Capital structure Target leverage Adjustment to target;

References

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Citations

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Cited by:
  1. Ogden, Joseph P. & Wu, Shanhong, 2013. "Reassessing the effect of growth options on leverage," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 182-195.
  2. Zhou, Qing & Faff, Robert & Alpert, Karen, 2014. "Bias correction in the estimation of dynamic panel models in corporate finance," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 494-513.
  3. Koh, SzeKee & Durand, Robert B. & Watson, Iain, 2011. "Seize the moment: Opportunism in Australian capital markets," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 374-389, September.
  4. Sánchez-Vidal, F. Javier, 2014. "High debt companies' leverage determinants in Spain: A quantile regression approach," Economic Modelling, Elsevier, vol. 36(C), pages 455-465.

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