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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.

Suggested Citation

  • Heshmati, Almas, 2001. "The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms," SSE/EFI Working Paper Series in Economics and Finance 0440, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0440
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    More about this item

    Keywords

    Capital structure; dynamic adjustment; optimal leverage; micro and firms;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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

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