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Firms' dynamic adjustment to target capital structures in transition economies

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Author Info
R.T.A. de Haas
H.M.M. Peeters

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Abstract

We study the capital structure dynamics of Central and Eastern European firms in order to get a better understanding of the quantitative and qualitative development of the financial systems in this region. The dynamic model we use endogenizes the target leverage as well as the adjustment speed and is applied to microeconomic data for ten countries. We find that during the transition process firms generally increased their leverage, lowering the gap between actual and target leverage. Profitability and age are the most robust determinants of capital structure targets. Older firms attract more bank debt, whereas profitability decreases firms' leverage targets. While banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still important. As a result, firms prefer internal finance to bank debt (pecking order behaviour) and adjust leverage only slowly.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 761.

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Length: 42 pages
Date of creation: May 2004
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Handle: RePEc:dnb:wormem:761

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Related research
Keywords: capital structure dynamics transition economies financial system development

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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    Other versions:
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    Other versions:
  20. Qaizar Hussain & Eugeniy Nivorozhkin, 1997. "The Capital Structure of Listed Companies in Poland," IMF Working Papers 97/175, International Monetary Fund.
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