Document Type

Article

Publication Date

2013

Publication Title

The Financial Review, Eastern Finance Association

Keywords

Strategic Management

Disciplines

Finance and Financial Management

Abstract

As a firm deviates from its target leverage, marginal bankruptcy costs change at a faster speed than marginal tax shield. This renders the speed of adjustment (SOA) of capital structure an increasing function of the starting deviation from the target. Adopting a bootstrapping-based estimation, we confirm the existence of such heterogeneity in SOA that is statistically significant and economically nontrivial. Typically, if Firm A is one standard deviation (about 17%) and Firm B is two standard deviations away from their leverage targets, then B’s SOA is 41% greater than that of A, and the half life of B’s leverage deviation is shorter by 2.5 years. The findings are consistent with the dynamic tradeoff theory in the presence of reasonable adjustment costs.

DOI

10.2139/ssrn.1927698

Version

Postprint

Volume

48

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