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Adjustment behaviour of capital structure over the business cycles: evidence from the construction industry of Taiwan


  • Hsien-Hung Herman Yeh


Prior studies have found that firms may deviate from the target capital structure in the short run and adjust towards the target in the long run. However, little attention has been given to the adjustment behaviour of capital structure in the construction industry over the business cycles, in particular within the context of emerging markets. The partial adjustment model with the GMM (i.e. generalized method of moments) estimation is used to examine the adjustment behaviour of capital structure in the construction industry within the context of Taiwan during the period 1982 to 2007. The results suggest that, first, the average rate of adjustment is 26.3% of the adjustment gap between the target debt ratios and the previous debt ratios for firms in the construction industry of Taiwan. However, the average rate of adjustment towards the target debt ratios has slowed down after the Asian financial crisis of 1997. Secondly, firms with the financial constraint of over-leverage relative to the target debt ratios have lower debt ratios than those firms with the financial constraint of under-leverage. In addition, the difference in debt ratios between firms with the financial constraint of over-leverage and under-leverage has become narrower after the Asian financial crisis. Lastly, the findings suggest that macroeconomic conditions do not have a significant, negative effect on debt ratios.

Suggested Citation

  • Hsien-Hung Herman Yeh, 2011. "Adjustment behaviour of capital structure over the business cycles: evidence from the construction industry of Taiwan," Construction Management and Economics, Taylor & Francis Journals, vol. 29(4), pages 329-340.
  • Handle: RePEc:taf:conmgt:v:29:y:2011:i:4:p:329-340
    DOI: 10.1080/01446193.2011.562910

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    References listed on IDEAS

    1. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    2. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    3. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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    Cited by:

    1. Leonard K Maina & Tobias Olweny & Kenneth L Wanjau, 2018. "Observed leverage and financial performance of listed firms in Kenya," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 7(2), pages 19-39, April.


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