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Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?

Author

Listed:
  • Christopher F Baum

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (Heriot-Watt University)

  • Abdul Rashid

    (International Islamic University, Islamabad, Pakistan)

Abstract

We empirically examine the influence of risk on firms' capital structure adjustments. The process of adjustment is asymmetric and depends on the type of risk, its magnitude, the firm's actual leverage with respect to its target, and its financial status. We show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our findings help to explain why managers seek to time equity and debt markets.

Suggested Citation

  • Christopher F Baum & Mustafa Caglayan & Abdul Rashid, 2013. "Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?," Boston College Working Papers in Economics 822, Boston College Department of Economics, revised 29 Aug 2016.
    • Handle: RePEc:boc:bocoec:822
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    Cited by:

    1. Elena Alexandra Nenu & Georgeta Vintilă & Ştefan Cristian Gherghina, 2018. "The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies," IJFS, MDPI, vol. 6(2), pages 1-29, April.
    2. Ha Thanh Nguyen & Balachandran Muniandy & Darren Henry, 2024. "Adjustment speed of capital structure: A literature survey of empirical research," Australian Journal of Management, Australian School of Business, vol. 49(3), pages 448-477, August.
    3. Masoud Taherinia & Mehrdad Matin & Jamal Valipour & Kavian Abdolahi & Peyman Shouryabi & Mohammad Mahdi Barzegar, 2024. "Capital Structure Adjustment Speed and Expected Returns: Examination of Information Asymmetry as a Moderating Role," Papers 2403.06035, arXiv.org.
    4. Bilgin, Rumeysa, 2023. "The Selection Of Control Variables In Capital Structure Research With Machine Learning," SocArXiv e26qf, Center for Open Science.
    5. Jiang, Jing & Wu, Shanhong, 2022. "The effects of cash-holding motivation on cash management dynamics," Research in International Business and Finance, Elsevier, vol. 59(C).
    6. Jacek Jaworski & Leszek Czerwonka, 2021. "Determinants of Enterprises’ Capital Structure in Energy Industry: Evidence from European Union," Energies, MDPI, vol. 14(7), pages 1-21, March.
    7. Wendy, & Salim, Kevin Christanto, 2019. "The Speed of Adjustment towards Optimal Capital Structure: A Test of Dynamic Trade-off Model," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 53(3), pages 91-102.
    8. Man Jin & Shunan Zhao & Subal C. Kumbhakar, 2020. "Information asymmetry and leverage adjustments: a semiparametric varying‐coefficient approach," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 183(2), pages 581-605, February.
    9. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. Aly Saad Mohamed Dawood & Mahmoud Otaify, 2021. "Target Capital Structure of Egyptian Listed Firms: Importance of Growth and Risk Factors," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(1), pages 158-173, January.
    11. Daskalakis, Nikolaos & Balios, Dimitrios & Dalla, Violetta, 2017. "The behaviour of SMEs' capital structure determinants in different macroeconomic states," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 248-260.
    12. Kenneth Yung & Xiang Long, 2022. "CEO overconfidence and the adjustment speed of leverage and cash: evidence on cash is not the same as negative debt," Empirical Economics, Springer, vol. 63(2), pages 1081-1108, August.
    13. Yukti Bajaj & Smita Kashiramka & Shveta Singh, 2024. "Does economic state matter for leverage adjustments? An India–China comparison," The World Economy, Wiley Blackwell, vol. 47(2), pages 492-518, February.
    14. Grau-Vera, David & Rubio, Gonzalo & Sogorb-Mira, Francisco, 2025. "Time-varying risk aversion and capital Structure: An overlooked effect," International Review of Economics & Finance, Elsevier, vol. 102(C).
    15. Wei He & NyoNyo A Kyaw, 2023. "Macroeconomic risks and capital structure adjustment speed: The Chinese evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2885-2899, July.
    16. repec:osf:socarx:e26qf_v1 is not listed on IDEAS
    17. Mohammad Nayeem Abdullah & Emon Kalyan Chowdhury & Rahat Bari Tooheen, 2022. "Determinants of capital structure in banking sector: a Bangladesh perspective," SN Business & Economics, Springer, vol. 2(12), pages 1-19, December.
    18. Jana Heckenbergerova & Irena Honkova, 2023. "Capital Structure Analysis – Theories and Determinants Validation Based on Evidence from the Czech Republic," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(1), pages 145-164, March.
    19. Natalia Nehrebecka & Aneta Dzik-Walczak, 2018. "The dynamic model of partial adjustment of the capital structure: Meta-analysis and a case of Polish enterprises," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(1), pages 55-81.
    20. Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2022. "Drought risk and capital structure dynamics," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3397-3439, September.
    21. Le, Ha Trang & Nguyen, Thao & Hunjra, Ahmed Imran & Truong, Cameron & Ntim, Collins, 2025. "CEO characteristics and capital structure dynamics: Evidence from a transitional economy," Emerging Markets Review, Elsevier, vol. 64(C).
    22. Tabash, Mosab I. & Farooq, Umar & Ashfaq, Khurram & Tiwari, Aviral Kumar, 2022. "Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).

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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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