IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v61y2021i4p5073-5109.html
   My bibliography  Save this article

Speed of adjustment towards target leverage: evidence from a quantile regression analysis

Author

Listed:
  • Thao Nguyen
  • Min Bai
  • Greg Hou
  • Cameron Truong

Abstract

Through employing a quantile regression approach and a dataset of 206,046 firm‐year observations over the period 1970–2017 in the United States market, we examine the heterogeneity and asymmetry in the speed of adjustment (SOA) towards target leverage. We document that high‐ and low‐levered firms adjust more quickly towards their target levels than do mid‐levered firms. This holds true when total leverage and long‐term leverage are considered in the analysis. Second, there is a difference in SOA between low‐ and high‐levered firms, which points to SOA skewness. Third, when short‐term leverage is considered in the analysis, the adjustment speed becomes smaller at varying levels of short‐term debts. Finally, empirical evidence from total leverage and long‐term leverage adjustments is consistent with the trade‐off theory, whereas empirical evidence from short‐term debt adjustments supports the pecking order theory.

Suggested Citation

  • Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2021. "Speed of adjustment towards target leverage: evidence from a quantile regression analysis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5073-5109, December.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:4:p:5073-5109
    DOI: 10.1111/acfi.12750
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12750
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12750?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
    2. Ming-Chang Cheng & Zuwei-Ching Tzeng, 2014. "Effect of Leverage on Firm Market Value and How Contextual Variables Influence this Relationship," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-63.
    3. Kayhan, Ayla & Titman, Sheridan, 2007. "Firms' histories and their capital structures," Journal of Financial Economics, Elsevier, vol. 83(1), pages 1-32, January.
    4. Cook, Douglas O. & Tang, Tian, 2010. "Macroeconomic conditions and capital structure adjustment speed," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 73-87, February.
    5. Bauer, Rob & Frijns, Bart & Otten, Rogér & Tourani-Rad, Alireza, 2008. "The impact of corporate governance on corporate performance: Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 236-251, June.
    6. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    7. Sheridan Titman & Sergey Tsyplakov, 2007. "A Dynamic Model of Optimal Capital Structure," Review of Finance, European Finance Association, vol. 11(3), pages 401-451.
    8. Cook, Douglas O. & Kieschnick, Robert & McCullough, B.D., 2008. "Regression analysis of proportions in finance with self selection," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 860-867, December.
    9. Lockhart, G. Brandon, 2014. "Credit lines and leverage adjustments," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 274-288.
    10. Fattouh, Bassam & Scaramozzino, Pasquale & Harris, Laurence, 2005. "Capital structure in South Korea: a quantile regression approach," Journal of Development Economics, Elsevier, vol. 76(1), pages 231-250, February.
    11. Serrasqueiro, Zélia & Nunes, Paulo Maçãs & da Silva, Jacinto Vidigal, 2012. "Are financing decisions of family-owned SMEs different? Empirical evidence using panel data," Journal of Management & Organization, Cambridge University Press, vol. 18(3), pages 363-382, May.
    12. 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.
    13. 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.
    14. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 175-198.
    15. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    16. Bassam Fattouh & Laurence Harris & Pasquale Scaramozzino, 2008. "Non-linearity in the determinants of capital structure: evidence from UK firms," Empirical Economics, Springer, vol. 34(3), pages 417-438, June.
    17. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    18. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 175-198, January.
    19. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    20. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    21. Antoniou, Antonios & Guney, Yilmaz & Paudyal, Krishna, 2008. "The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 59-92, March.
    22. Faulkender, Michael & Flannery, Mark J. & Hankins, Kristine Watson & Smith, Jason M., 2012. "Cash flows and leverage adjustments," Journal of Financial Economics, Elsevier, vol. 103(3), pages 632-646.
    23. Tanveer Ahsan & Wang Man & Muhammad Azeem Qureshi, 2016. "Mean reverting financial leverage: theory and evidence from Pakistan," Applied Economics, Taylor & Francis Journals, vol. 48(5), pages 379-388, January.
    24. Li-Kai (Connie) Liao & Tarun Mukherjee & Wei Wang, 2015. "Corporate Governance And Capital Structure Dynamics: An Empirical Study," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 38(2), pages 169-192, June.
    25. Soku Byoun, 2008. "How and When Do Firms Adjust Their Capital Structures toward Targets?," Journal of Finance, American Finance Association, vol. 63(6), pages 3069-3096, December.
    26. Surenderrao Komera & P. J. Jijo Lukose, 2016. "Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-26, September.
    27. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    28. Cho, Seong-Soon & El Ghoul, Sadok & Guedhami, Omrane & Suh, Jungwon, 2014. "Creditor rights and capital structure: Evidence from international data," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 40-60.
    29. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate Governance, Incentives, and Tax Avoidance," Research Papers 2134, Stanford University, Graduate School of Business.
    30. Devos, Erik & Dhillon, Upinder & Jagannathan, Murali & Krishnamurthy, Srinivasan, 2012. "Why are firms unlevered?," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 664-682.
    31. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    32. Deesomsak, Rataporn & Paudyal, Krishna & Pescetto, Gioia, 2004. "The determinants of capital structure: evidence from the Asia Pacific region," Journal of Multinational Financial Management, Elsevier, vol. 14(4-5), pages 387-405.
    33. Zhen Huang & Wanli Li & Weiwei Gao, 2017. "Why do firms choose zero-leverage policy? Evidence from China," Applied Economics, Taylor & Francis Journals, vol. 49(28), pages 2736-2748, June.
    34. Ralf Elsas & David Florysiak, 2011. "Heterogeneity in the Speed of Adjustment toward Target Leverage," International Review of Finance, International Review of Finance Ltd., vol. 11(2), pages 181-211, June.
    35. Saumitra Bhaduri, 2002. "Determinants of capital structure choice: a study of the Indian corporate sector," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 655-665.
    36. Dudley, Evan, 2012. "Capital structure and large investment projects," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1168-1192.
    37. Öztekin, Özde & Flannery, Mark J., 2012. "Institutional determinants of capital structure adjustment speeds," Journal of Financial Economics, Elsevier, vol. 103(1), pages 88-112.
    38. Shamsher M. & M. Ariff & Taufiq H, 2008. "How Capital Structure Adjusts Dynamically during Financial Crisis," CARF F-Series CARF-F-130, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    39. Hovakimian, Armen & Li, Guangzhong, 2011. "In search of conclusive evidence: How to test for adjustment to target capital structure," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 33-44, February.
    40. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    41. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
    42. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2015. "In search of robust methods for dynamic panel data models in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 84-98.
    43. Chang, Ya-Kai & Chou, Robin K. & Huang, Tai-Hsin, 2014. "Corporate governance and the dynamics of capital structure: New evidence," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 374-385.
    44. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate governance, incentives, and tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 1-17.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Uz Zaman, Qamar & Ehsan, Sadaf & Hassan, Mohammad Kabir & Javed, Muzhar & Ul Hassan, Syed Iftikhar, 2022. "Corporate Social Responsibility and Zero Leverage," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 33-46.
    2. Daisuke Tsuruta, 2023. "Do small businesses adjust their capital structure? Evidence from the global financial crisis in Japan," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 843-871, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2022. "Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms," Research in International Business and Finance, Elsevier, vol. 62(C).
    2. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    5. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    6. Durand, Robert B. & Greene, William H. & Harris, Mark N. & Khoo, Joye, 2022. "Heterogeneity in speed of adjustment using finite mixture models," Economic Modelling, Elsevier, vol. 107(C).
    7. Dang, Tung Lam & Dang, Viet Anh & Moshirian, Fariborz & Nguyen, Lily & Zhang, Bohui, 2019. "News media coverage and corporate leverage adjustments," Journal of Banking & Finance, Elsevier, vol. 109(C).
    8. Nguyen, Thao & Bai, Min & Hou, Greg & Vu, Manh-Chien, 2020. "State ownership and adjustment speed toward target leverage: Evidence from a transitional economy," Research in International Business and Finance, Elsevier, vol. 53(C).
    9. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    10. Christopher F. Baum & Mustafa Caglayan & Abdul Rashid, 2017. "Capital structure adjustments: Do macroeconomic and business risks matter?," Empirical Economics, Springer, vol. 53(4), pages 1463-1502, December.
    11. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 103-124, November.
    12. Ho, Ly & Bai, Min & Lu, Yue & Qin, Yafeng, 2021. "The effect of corporate sustainability performance on leverage adjustments," The British Accounting Review, Elsevier, vol. 53(5).
    13. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    14. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    15. An, Zhe & Chen, Chen & Li, Donghui & Yin, Chao, 2021. "Foreign institutional ownership and the speed of leverage adjustment: International evidence," Journal of Corporate Finance, Elsevier, vol. 68(C).
    16. Biswajit Ghose, 2017. "Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector," Emerging Economy Studies, International Management Institute, vol. 3(1), pages 54-67, May.
    17. Natalia Szomko, 2020. "Factors Associated with the Capital Structure of Polish Companies in the Long and Short Term," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 55-74.
    18. Wolfgang Drobetz & Dirk C. Schilling & Henning Schröder, 2015. "Heterogeneity in the Speed of Capital Structure Adjustment across Countries and over the Business Cycle," European Financial Management, European Financial Management Association, vol. 21(5), pages 936-973, November.
    19. Zhou, Qing & Tan, Kelvin Jui Keng & Faff, Robert & Zhu, Yushu, 2016. "Deviation from target capital structure, cost of equity and speed of adjustment," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 99-120.
    20. Biswajit Ghose & Kailash Chandra Kabra, 2018. "Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence," Business Perspectives and Research, , vol. 6(1), pages 27-41, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:61:y:2021:i:4:p:5073-5109. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.