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The Dynamics of Capital Structure

  • Banerjee, Saugata

    (College of Administrative Sciences and Economics)

  • Heshmati, Almas

    ()

    (Dept. of Economic Statistics, Stockholm School of Economics)

  • Wihlborg, Clas

    ()

    (School of Economics and Commercial Law)

The common approach in empirical capital structure research has been to study the determinants of optimal leverage by studying the association between observed leverage and a set of explanatory variables. This approach has two major shortcomings. First, the observed leverage need not necessarily be the optimal leverage. Second, the empirical analyses, being effectively non-dynamic, are unable to shed any light on the nature of dynamic capital structure adjustment by firms. In this paper, we use a dynamic adjustment model, and panel data methodology on a sample of UK and US firms to specifically establish the determinants of a time-varying optimal capital structure. In addition, the model allows for the possibility that at any point in time firms' observed leverage may not be optimal, and that firms differ in their speed of adjustment towards the optimal capital structure, which itself may be changing over time for the same firm. We also attempt to identify factors determining the speed of adjustment. We find that firms typically have capital structures that are not at the target, and that they adjust very slowly towards the target.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 333.

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Length: 21 pages
Date of creation: 21 Sep 1999
Date of revision: 12 May 2000
Publication status: Published in Research in Banking and Finance, 2004, pages 275-297.
Handle: RePEc:hhs:hastef:0333
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
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  1. Michael S. Long & Ileen B. Malitz, 1985. "Investment Patterns and Financial Leverage," NBER Chapters, in: Corporate Capital Structures in the United States, pages 325-352 National Bureau of Economic Research, Inc.
  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. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  4. Kumbhakar, Subal C. & Heshmati, Almas & Hjalmarsson, Lennart, 2000. "How Fast Do Banks Adjust? A Dynamic Model of Labor-Use with an Application to Swedish Banks," SSE/EFI Working Paper Series in Economics and Finance 411, Stockholm School of Economics, revised Nov 2001.
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  6. Kumbhakar, Subal C & Heshmati, Almas & Hjalmarsson, Lennart, 1999. " Parametric Approaches to Productivity Measurement: A Comparison among Alternative Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 405-24, September.
  7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Jalilvand, Abolhassan & Harris, Robert S, 1984. " Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-45, March.
  9. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  11. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  13. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  14. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
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