Journal of International Money and Finance
Capital structure, Trade-off theory, Partial adjustment model, Target financing model, Random financing, Speed of adjustment
Business | Finance and Financial Management
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%).
Maroney, Neal; Wang, Wei; and Hassan, M. Kabir, "Incorporating Active Adjustment into a Financing Based Model of Capital Structure" (2019). Business Faculty Publications. 281.
This is the author’s version of a work that was accepted for publication in Journal of International Money and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in the Journal of International Money and Finance, 90, (2019), 10.1016/j.jimonfin.2018.09.011.
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