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The Debt-Equity Choice of Japanese Firms


  • Daniel Tak Yan Law

    (The Chinese University of Hong Kong, Department of Economics)

  • Feng Yao

    (West Virginia University, College of Business and Economics)


Prior studies on the debt-equity choice of firms focus on capital market oriented economies. This paper examines whether firms in Japan, the world's largest bank-oriented economy, adjust their debt-equity choice towards the target. We find that the leverage rations of Japanese firms do adjust slowly towards their target levels. The adjustment speed has dwindled after the Asian Financial Crisis. In contrast to existing literature, we show that an increase in tangible assets reduces the leverage ratio of firms in Japan. It is also found that the effect of financial deficit is persistent while the market timing effect is not.

Suggested Citation

  • Daniel Tak Yan Law & Feng Yao, 2012. "The Debt-Equity Choice of Japanese Firms," Working Papers 13-09, Department of Economics, West Virginia University.
  • Handle: RePEc:wvu:wpaper:13-09

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    References listed on IDEAS

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    More about this item


    Debt-equity choice; Pecking Order Theory; Market Timing Theory; Trade-Off Theory;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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