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

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  • Wolfgang Drobetz
  • Gabrielle Wanzenried
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    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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    File URL: http://www.vwl.unibe.ch/papers/dp/dp0415.pdf
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    Bibliographic Info

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

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    Cited by:
    1. Dirk Hackbarth & Jianjun Miao & Erwan Morellec, 2005. "Capital Structure, Credit Risk, and Macroeconomic Conditions," CEMA Working Papers 439, China Economics and Management Academy, Central University of Finance and Economics.
    2. Wolfgang Drobetz & Pascal Pensa & Claudia B. Wöhle, 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.

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