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The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms

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  • Heshmati, Almas

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

Capital structure studies have generally been aimed at studying the determinants of optimal leverage. Empirically, the focus is, however, on studying the association between observed leverage and a set of explanatory variables. This approach has a number of shortcomings. First, the observed leverage deviates from the optimal leverage. Second, the empirical analyses are static. Third, adjustments are non-constant. In this paper, we formulate a dynamic adjustment model. We specify and estimate the unobservable optimal capital structure using observable determinants. The optimal level varies, allowing for deviations of observed leverage from optimal leverage. This model is specified such that the speed of adjustment towards the optimal level is firm- and time-specific. Identification of determinants and estimation of the level of optimal capital structure and speed of adjustment allow for flexible determination and adjustment of the effective level of capital structure. Empirical analysis is based on a large sample of Swedish micro and small firms. We find that the observed capital structure exceeds the target, and that adjustment towards the target level is very slow.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0440.

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Length: 36 pages
Date of creation: 02 Apr 2001
Date of revision:
Publication status: Published in Research in Banking and Finance, 2002, pages 199-241.
Handle: RePEc:hhs:hastef:0440

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
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Web page: http://www.hhs.se/
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Keywords: Capital structure; dynamic adjustment; optimal leverage; micro and firms;

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Cited by:
  1. Faris Nasif Al-Shubiri, 2011. "Capital Structure and Market Power: Evidence from Jordanian Banks," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 9(3), pages 289-310.
  2. Nivorozhkin, Eugene, 2004. "Financing Choices of Firms in EU Accession Countries," Ratio Working Papers 33, The Ratio Institute.
  3. Wolfgang Drobetz & Gabrielle Wanzenried, 2004. "What Determines the Speed of Adjustment to the Target Capital Structure?," Diskussionsschriften dp0415, Universitaet Bern, Departement Volkswirtschaft.
  4. R.T.A. de Haas & H.M.M. Peeters, 2004. "Firms' dynamic adjustment to target capital structures in transition economies," WO Research Memoranda (discontinued) 761, Netherlands Central Bank, Research Department.
  5. Hyytinen, Ari & Pajarinen, Mika, 2001. "Financial Systems and Venture Capital in Nordic Countries: A comparative Study," Discussion Papers 774, The Research Institute of the Finnish Economy.
  6. Haouas, Ilham & Yagoubi, Mahmoud & Heshmati, Almas, 2002. "Labour-Use Efficiency in Tunisian Manufacturing Industries: A Flexible Adjustment Model," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Degryse, H.A. & Goeij, P. C. de & Kappert, P., 2009. "The Impact of Firm and Industry Characteristics on Small Firms' Capital Structure: Evidence from Dutch Panel Data," Discussion Paper 2009-009, Tilburg University, Tilburg Law and Economic Center.
  8. Hyesung Kim & Almas Heshmati & Dany Aoun, 2006. "Dynamics of Capital Structure: The Case of Korean Listed Manufacturing Companies ," Asian Economic Journal, East Asian Economic Association, vol. 20(3), pages 275-302, 09.
  9. Nivorozhkin, Eugene, 2004. "Financing choices of firms in EU accession countries," BOFIT Discussion Papers 6/2004, Bank of Finland, Institute for Economies in Transition.
  10. Duc Khuong Nguyen & Adel Boubaker, 2009. "Does financing behavior of Tunisian firms follow the predictions of the market timing theory of capital structure?," Economics Bulletin, AccessEcon, vol. 29(1), pages 169-181.
  11. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2004. "Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?," Finance 0405007, EconWPA.
  12. Saggay, Ali & Heshmati, Almas & Adel Dhif, Mohamed, 2006. "Effects of Trade Liberalization on Domestic Prices: Some Evidence from Tunisian Manufacturing," Ratio Working Papers 96, The Ratio Institute.
  13. Wolfgang Drobetz & Gabrielle Wanzenried, 2006. "What determines the speed of adjustment to the target capital structure?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 941-958.
  14. Lee, Minkyu & Heshmati, Almas, 2006. "A Dynamic Flexible Partial-Adjustment Model of International Diffusion of the Internet," Ratio Working Papers 99, The Ratio Institute.

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