Document Type

Article

Publication Date

2-28-2019

Publication Title

Journal of International Money and Finance

Keywords

Capital structure, Trade-off theory, Partial adjustment model, Target financing model, Random financing, Speed of adjustment

Disciplines

Business | Finance and Financial Management

Abstract

The conventional partial adjustment model, which focuses on leverage evolution, has difficulty identifying deliberate capital structure adjustments as it confounds financing decisions with the mechanical autocorrelation of leverage. We propose and estimate a financing-based partial adjustment model that separates the effects of financing decisions on leverage evolution from mechanical evolution. The speed of adjustment (SOA) is firm specific and stochastic, and active targeting of capital structure has a multiplier effect that depends on the size of financial deficit. Overall, we find expected SOA from active rebalancing
(30%) more than doubles what is expected from mechanical mean reversion alone (13%).

DOI

10.1016/j.jimonfin.2018.09.011

Version

Postprint

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Volume

90

Available for download on Sunday, February 28, 2021

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