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What Determines the Speed of Adjustment to the Target Capital Structure?

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Author Info
Wolfgang Drobetz
Gabrielle Wanzenried
Abstract

We use a dynamic adjustment model and panel methodology to investigate the determinants of a time-varying optimal capital structure. Because firms may temporarily deviate from their optimal capital structure in the presence of adjustment costs, we also endogenize the adjustment process. In particular, we analyze the effects of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target leverage. Our sample comprises a panel of 90 Swiss firms over the years 1991 to 2001. We find that faster growing firms and those that are further away from their optimal capital structure adjust more readily. Our results also reveal interesting interrelations between the adjustment speed and popular business cycle variables. For example, the speed of adjustment is higher when the term spread is higher, i.e., when economic prospects are good

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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0415.

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Date of creation: Sep 2004
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Handle: RePEc:ube:dpvwib:dp0415

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Related research
Keywords: Capital structure; dynamic adjustment; business cycle; panel data;

Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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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.:
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  1. Dirk Hackbarth & Junjian Miao & Erwan Morellec, 2005. "Capital Structure, Credit Risk, and Macroeconomic Conditions," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-005, Boston University - Department of Economics. [Downloadable!]
    Other versions:
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