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A note on capital structure target adjustment – Indonesian evidence

Author

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  • Ludwig Reinhard
  • Steven Li

Abstract

Purpose - The purpose of this paper is to investigate whether existing capital structure target adjustment models are able to identify whether companies adjust their capital structures towards an (unobservable) target. Design/methodology/approach - Existing capital structure target adjustment models are applied to a specific dataset by using different regression techniques (ordinary least square, fixed effect, Fama‐MacBeth, least square dummy variable “corrected”, SYS‐GMM). Findings - Existing capital structure target adjustment models are not able to identify whether companies adjust their capital structures towards a target or not. They might indeed indicate target adjustment behaviour when companies' capital structures actually move away from their targets. Research limitations/implications - As target adjustment behaviour is often used as support for the trade‐off and against the pecking order theory, the “horse race” between both theories seems still to be open. Originality/value - This paper highlights some of the fallacies of existing capital structure target adjustment models and demonstrates that the results obtained by those models can be highly misleading.

Suggested Citation

  • Ludwig Reinhard & Steven Li, 2010. "A note on capital structure target adjustment – Indonesian evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 6(3), pages 245-259, June.
    • Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:3:p:245-259
    DOI: 10.1108/17439131011056242
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