Asymmetric adjustment toward optimal capital structure: evidence from a crisis

Dang, V. A., Kim, M. and Shin, Y. (2014) Asymmetric adjustment toward optimal capital structure: evidence from a crisis. International Review of Financial Analysis, 33, pp. 226-242. (doi: 10.1016/j.irfa.2014.02.013)

Abstract

We employ dynamic threshold partial adjustment models to study the asymmetries in firms' adjustments toward their target leverage. Using a sample of US firms during 2002-2012, we document a negative impact of the Global Financial Crisis on the speed of leverage adjustment. In our subperiod analysis, we find moderate evidence of cross-sectional heterogeneity in this speed, which seems more pronounced pre-crisis and provides little support for the financial constraint view. For the pre-crisis period, more constrained firms, such as those with high growth, with large investment, of small size, and with volatile earnings, adjust their capital structures more quickly than their less constrained counterparts. These firms rely heavily on external funds to offset their large financing deficits, suggesting that their higher adjustment speeds may be driven by lower adjustment costs that are shared with the transaction costs of accessing external capital markets. For the crisis period, the speed of adjustment only varies with the deviation from target leverage, with only firms having sufficiently large deviations attempting to revert to the target, albeit slowly. Overall, our results provide new evidence of both cross-sectional and time-varying asymmetries in capital structure adjustments, which is consistent with the trade-off theory.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Kim, Dr Minjoo
• Authors: Dang, V. A., Kim, M., and Shin, Y.
• Subjects: H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: International Review of Financial Analysis
• Publisher: Elsevier Inc.
• ISSN: 1057-5219
• ISSN (Online): 1873-8079