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Fundamental Risk and Capital Structure Adjustment Speed: International Evidence

Author

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  • Dilesh Rawal

    (School of Commerce, Birla Global University, Bhubaneswar 751019, India
    Department of Humanities and Social Science, Indian Institute of Technology Kharagpur (IIT Kharagpur), Kharagpur 721302, India)

  • Jitendra Mahakud

    (Department of Humanities and Social Science, Indian Institute of Technology Kharagpur (IIT Kharagpur), Kharagpur 721302, India)

  • L Maheswar Rao Achary

    (Department of Finance and Accounting, Indian Institute of Management Indore (IIM Indore), Prabandh Shikhar, Rau-Pithampur Rd, Indore 453556, India)

Abstract

This study investigates the impact of countries’ fundamental risk on the speed of adjustment (SOA) towards firms’ target capital structures. Using a dataset comprising 17,747 non-financial firms from 44 countries, this study finds that a reduction in country-specific fundamental risk significantly increases a firm’s rate of leverage adjustment. More specifically, we observe that a one standard deviation reduction in fundamental risk results in a substantial 12.79% increase in SOA for book leverage and a 4.81% increase for market leverage. The study also finds evidence of the influence of individual dimensions of fundamental risk on SOA. It implies that improved operational efficiency, high foreign accessibility, enhanced corporate transparency, and increased political stability expedite the pace of leverage adjustment within firms. Robustness checks using a machine learning random forest estimator predicted leverage targets to corroborate these findings. The results highlight the critical role of institutional quality in reducing financing frictions and promoting more efficient corporate capital adjustments. These insights have profound implications for policymakers, emphasising the need to strengthen institutional and regulatory frameworks to enhance capital market integrity and reduce friction, which could ultimately create value for the firm stakeholders.

Suggested Citation

  • Dilesh Rawal & Jitendra Mahakud & L Maheswar Rao Achary, 2025. "Fundamental Risk and Capital Structure Adjustment Speed: International Evidence," JRFM, MDPI, vol. 18(8), pages 1-20, August.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2025:i:8:p:468-:d:1729614
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    References listed on IDEAS

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