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Adjustment Cost Determinants and Target Capital Structure


  • Costas Lambrinoudakis

    () (University of Piraeus, Greece)


Dynamic trade-off models of capital structure predict negative correlation between adjustment speed and adjustment costs. This paper empirically tests this prediction by bringing together elements from two strands of the literature: dynamic capital structure and security offerings literature. In contrast to existing studies, this approach employs directly measurable proxies for adjustment cost (security issuance cost) determinants. The correlation between adjustment costs and the speed of adjustment is found to be positive or zero. From a dynamic trade-off perspective, these results are puzzling as they suggest that transaction costs cannot explain the observed pattern of the capital structure adjustment process.

Suggested Citation

  • Costas Lambrinoudakis, 2016. "Adjustment Cost Determinants and Target Capital Structure," Multinational Finance Journal, Multinational Finance Journal, vol. 20(1), pages 1-39, March.
  • Handle: RePEc:mfj:journl:v:20:y:2016:i:1:p:1-39

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    References listed on IDEAS

    1. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. "On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-878, July.
    2. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    3. Brounen, Dirk & de Jong, Abe & Koedijk, Kees, 2006. "Capital structure policies in Europe: Survey evidence," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1409-1442, May.
    4. Franck Bancel & Usha R. Mittoo, 2004. "Cross-Country Determinants of Capital Structure Choice: A Survey of European Firms," Financial Management, Financial Management Association, vol. 33(4), Winter.
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    Cited by:

    1. Shab Hundal & Annika Sandstrom & Assel Uskumbayeva, 2018. "The Impact Of The Financial Crisis On Corporate Capital Structure Dynamics In The Nordic Countries," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(3), pages 34-51.
    2. Miglo, Anton, 2020. "Zero-Debt Policy under Asymmetric Information, Flexibility and Free Cash Flow Considerations," MPRA Paper 98631, University Library of Munich, Germany.

    More about this item


    capital structure; target leverage; adjustment speed; security issuance costs;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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