The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms
AbstractCapital 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 InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0440.
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.
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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Capital structure; dynamic adjustment; optimal leverage; micro and firms;
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
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