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Firm Characteristics, Economic Conditions and Capital Structure Adjustment

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  • Drobetz, Wolfgang

    (University of Basel)

  • Pensa, Pascal
  • Wanzenried, Gabrielle

Abstract

We use a dynamic framework and panel methodology to investigate the NEWLINE determinants of a firms' time-varying capital structure. Our sample comprises NEWLINE 706 European firms from France, Germany, Italy and the U.K. over NEWLINE the period from 1983 to 2002. If capital structure adjustment is costly, firms NEWLINE may deviate temporarily from their target debt ratios. Therefore, we endogenize NEWLINE the adjustment process and analyze the impact of firm-specific NEWLINE characteristics as well as macroeconomic factors on the speed of adjustment NEWLINE towards target leverage. We find that larger and faster growing firms as well NEWLINE as firms that are further away from their targets adjust more readily. Additionally, NEWLINE we document interesting relations between well-known business NEWLINE cycle variables and the adjustment speed. In a nutshell, firms adjust faster in NEWLINE favorable macroeconomic conditions, e.g. if interest rates are low and the NEWLINE risk of disruptions in the global financial system are negligible. We also NEWLINE document that capital structure decision are largely determined by financial NEWLINE constraints. Finally, we shed new light on the interdependence between NEWLINE book value based and market value based measures of leverage as well as on NEWLINE capital structure rebalancing issues.

Suggested Citation

  • 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.
    • Handle: RePEc:bsl:wpaper:2007/16
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    2. Belen Nieto & Rosa Rodriguez, 2015. "Corporate Stock and Bond Return Correlations and Dynamic Adjustments of Capital Structure," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 705-746, June.
    3. Strike Mbulawa & Nathan F. Okurut & Mogale Ntsosa & Narain Sinha, 2020. "Optimal Capital Structure and Speed of Adjustment under Hyperinflation and Dollarization," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 158-177, May.
    4. Gonzalo Rubio & Francisco Sogorb, 2011. "The Adjustment To Target Leverage Of Spanish Public Firms: Macroeconomic Conditions And Distance From Target," Revista de Economia Aplicada, Universidad de Zaragoza, Departamento de Estructura Economica y Economia Publica, vol. 19(3), pages 35-63, Winter.
    5. Liu, Haiming & Chiang, Yao-Min & Tsai, Hui-Ju, 2020. "The impact of loan rollover restrictions on capital structure adjustments, leverage deviations, and firm values," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    6. An Thai & Radu Burlacu, 2022. "Adjustment Speed toward Target Leverage Throughout the Vietnamese Corporate Life Cycle: Under-Versus Over-the-Target Firms," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 18(3), pages 315-341, November.

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    More about this item

    Keywords

    Capital Structure; dynamic analysis; panel data;
    All these keywords.

    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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