Momentum Market States And Capital Structure Adjustment Speed

It is well established in the momentum literature that market states affect momentum profit. Moreover, the market state variables employed in the momentum literature are distinctive in that they are constructed to be ex-ante observable by the investor. This study shows that these momentum market state variables also significantly affect a company’s capital structure adjustment speed. Our results provide a plausible explanation of how the momentum market state variables lead to momentum profit by affecting the capital structure. Additional findings show that low leveraged firms adjust their leverage toward target capital structure faster than high leveraged firms. We also show that producer linked variables such as total industry capacity utilization and producer price index significantly affect capital structure adjustment speeds, more so than standard macroeconomic variables