Market Imperfections, Macroeconomic Conditions, and Capital Structure Dynamics: A Cross-Country Study
Emerging Markets Finance and Trade
adjustment costs, capital structure, macroeconomic conditions, market imperfections, mechanical mean reversion, procyclicality, speed of adjustment (SOA
Business | Economics | Finance and Financial Management | Macroeconomics
This paper investigates how “systematic” adjustment costs proxied by market imperfections and macroeconomic conditions affect capital structure dynamics in a cross-country setting. We document substantial variations in firms’ capital structure adjustments across countries and, particularly, over time. Consistent with adjustment costs impeding firms from rebalancing their capital structures, worse market imperfections are associated with slower speeds of adjustment (SOA) and larger leverage deviations. Intertemporally, capital structure adjustment is procyclical, with SOA increasing by 0.9 percentage point for a one-percentage-point increase in GDP growth rate. The procyclicality is attributable to good macroeconomic conditions mitigating market imperfections through channels of 1) facilitating free-ride restructuring, and 2) uncertainty alleviation. Our investigation features a bootstrapping-based estimation method that addresses the mechanical mean reversion of leverage ratio.
Kang, Moonsoo; Wang, Wei; and Xiao, Ying, "Market Imperfections, Macroeconomic Conditions, and Capital Structure Dynamics: A Cross-Country Study" (2018). Business Faculty Publications. 283.
“This is an Accepted Manuscript of an article published by Taylor & Francis in Emerging Markets Finance and Trade on April 30th, 2018, available online: http://www.tandfonline.com/10.1080/1540496X.2017.1326380."