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Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization

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  • Gamage, Charith B.

Abstract

Do firms change their capital structure adjustment speed towards a target when adjustment costs change? Under a unified capital structure approach that combines the static trade-off and pecking order theories, firms minimize adjustment costs in setting their target adjustment speed. For below-target firms, the availability of share repurchases lowers the expected cost of increasing leverage towards the target. Extending the adjustment cost-based unified framework to the availability of share repurchases, which exogenously lowers the expected cost of leverage increases for below-target firms, I show the availability of share repurchases to result in these firms increasing their leverage adjustment speed towards a target. As predicted, this effect does not hold for the above-target firms.

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  • Gamage, Charith B., 2023. "Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization," Journal of International Money and Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001760
    DOI: 10.1016/j.jimonfin.2022.102773
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    More about this item

    Keywords

    Adjustment costs; Target adjustment speed; Share repurchases;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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