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Firm Characteristics and Dynamic Capital Structure Adjustment


  • Drobetz, Wolfgang
  • Pensa, Pascal

    () (University of Basel)

  • Wanzenried, Gabrielle


We use a dynamic framework and panel methodology to investigate the determinants of a time-varying corporate capital structure. Our sample comprises 706 European firms from France, Germany, Italy and the U.K. over the period from 1983 to 2002. If capital structure adjustment is costly, firms may deviate temporarily from their target debt ratios. Therefore, we investigate the adjustment process and analyze the impact of well-known firm characteristic variables on the speed of adjustment towards a endogenously specified target debt ratio. We find that larger and faster growing firms adjust their capital structure more readily. Furthermore, large deviations from target debt ratios lead to faster readjustment. Additionally, we shed new light on capital structure rebalancing arguments. We document that large swings in market values of leverage lead to readjustment in the corresponding book values of leverage in the following periods. Finally, we find that capital structure adjustments are largely determined by financial constraints, i.e. firms in unfavourable financial conditions show only little or no adjustment behavior at all.

Suggested Citation

  • Drobetz, Wolfgang & Pensa, Pascal & Wanzenried, Gabrielle, 2006. "Firm Characteristics and Dynamic Capital Structure Adjustment," Working papers 2006/10, Faculty of Business and Economics - University of Basel.
  • Handle: RePEc:bsl:wpaper:2006/10

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    Cited by:

    1. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    2. Drobetz, Wolfgang & Pensa, Pascal & Wanzenried, Gabrielle, 2007. "Firm Characteristics, Economic Conditions and Capital Structure Adjustment," Working papers 2007/16, Faculty of Business and Economics - University of Basel.

    More about this item


    Capital structure; dynamic analysis; panel data;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models


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