The Dynamics of Capital Structure
AbstractThe common approach in empirical capital structure research has been to study the determinants of optimal leverage by studying the association between observed leverage and a set of explanatory variables. This approach has two major shortcomings. First, the observed leverage need not necessarily be the optimal leverage. Second, the empirical analyses, being effectively non-dynamic, are unable to shed any light on the nature of dynamic capital structure adjustment by firms. In this paper, we use a dynamic adjustment model, and panel data methodology on a sample of UK and US firms to specifically establish the determinants of a time-varying optimal capital structure. In addition, the model allows for the possibility that at any point in time firms' observed leverage may not be optimal, and that firms differ in their speed of adjustment towards the optimal capital structure, which itself may be changing over time for the same firm. We also attempt to identify factors determining the speed of adjustment. We find that firms typically have capital structures that are not at the target, and that they adjust very slowly towards the target.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 333.
Length: 21 pages
Date of creation: 21 Sep 1999
Date of revision: 12 May 2000
Publication status: Published in Research in Banking and Finance, 2004, pages 275-297.
Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
Capital structure; dynamic adjustment; optimal leverage; firms; panel data;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-24 (All new papers)
- NEP-CFN-2000-01-24 (Corporate Finance)
- NEP-ETS-2000-01-24 (Econometric Time Series)
- NEP-FIN-2000-01-24 (Finance)
- NEP-TID-2000-01-24 (Technology & Industrial Dynamics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kumbhakar, Subal C. & Heshmati, Almas & Hjalmarsson, Lennart, 2000.
"How Fast Do Banks Adjust? A Dynamic Model of Labor-Use with an Application to Swedish Banks,"
Working Paper Series in Economics and Finance
411, Stockholm School of Economics, revised Nov 2001.
- Subal Kumbhakar & Almas Heshmati & Lennart Hjalmarsson, 2002. "How Fast Do Banks Adjust? A Dynamic Model of Labor-Use with an Application to Swedish Banks," Journal of Productivity Analysis, Springer, vol. 18(1), pages 79-102, July.
- Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
- Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
- Jalilvand, Abolhassan & Harris, Robert S, 1984. " Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-45, March.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
- Raghuram G. Rajan & Luigi Zingales, 1994.
"What Do We Know About Capital Structure? Some Evidence from International Data,"
NBER Working Papers
4875, National Bureau of Economic Research, Inc.
- Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
- Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
- Kumbhakar, Subal C & Heshmati, Almas & Hjalmarsson, Lennart, 1999. " Parametric Approaches to Productivity Measurement: A Comparison among Alternative Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 405-24, September.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Michael S. Long & Ileen B. Malitz, 1985. "Investment Patterns and Financial Leverage," NBER Chapters, in: Corporate Capital Structures in the United States, pages 325-352 National Bureau of Economic Research, Inc.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin).
If references are entirely missing, you can add them using this form.