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Capital structure adjustment speed over the business cycle

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  • Gan, Liu
  • Lv, Wujun
  • Chen, Yifei

Abstract

This paper extends the DeMazro and He (2019) model of capital structure dynamics by introducing macroeconomic conditions. Our goal is to analyze how business cycle risks impact a firm’s capital structure adjustment speed. Based on our calibration, the model predicts that the capital structure adjustment is slower in the presence of macroeconomic risk. Importantly, we also demonstrate that firms adjust their capital structure faster in good macroeconomic states versus bad economic states, which is consistent with empirical evidence. Finally, we provide several new predictions for how the key parameters of the model affect a firm’s capital structure adjustment speed.

Suggested Citation

  • Gan, Liu & Lv, Wujun & Chen, Yifei, 2021. "Capital structure adjustment speed over the business cycle," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319305185
    DOI: 10.1016/j.frl.2020.101574
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    Cited by:

    1. Emmanuel Kukah Damina & Taiwo Muritala & Abbas Umar Ibrahim, 2022. "Effect of Speed of Adjustments on Capital Structure Decision: A Conceptual Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 15-21, November.
    2. Sylwia Kruk, 2021. "Impact of Capital Structure on Corporate Value—Review of Literature," JRFM, MDPI, vol. 14(4), pages 1-13, April.
    3. Obaid Ur Rehman & Xiaoxing Liu & Kai Wu & Junfeng Li, 2023. "Customer concentration, leverage adjustments, and firm value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2035-2079, June.

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    More about this item

    Keywords

    Dynamic capital structure; Speed of adjustment; Macroeconomic conditions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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