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A note on capital structure target adjustment – Indonesian evidence

  • Ludwig Reinhard
  • Steven Li
Registered author(s):

    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.

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    Article provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.

    Volume (Year): 6 (2010)
    Issue (Month): 3 (July)
    Pages: 245-259

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    Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:3:p:245-259
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