Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector

Giorgio Canarella and Stephen Miller

No 2019-06, Working papers from University of Connecticut, Department of Economics

Abstract: We employ a dynamic adjustment model (Flannery and Rangan, 2006) to investigate the determinants of capital structure and speed of adjustment (Drobetz and Wanzenried, 2006) in a panel of 85 U.S. ICT firms over the years 1990 to 2013. We estimate the capital structure using a wide range of factors commonly used in the empirical literature (growth and investment opportunities, profitability, firm size, default risk, and industry median capital structure). We expand on this literature to include two additional determinants: asset turnover, an inverse measure of firm agency costs (Morellec, et al., 2012; Ang, Cole, and Lin, 2000), and R&D activity (Aghion, et al., 2004). We find that the speed of adjustment increases with firm size, growth opportunities, and distance from the target capital structure, and decreases with default risk and agency costs. We also find that R&D expenditures and agency costs cause firms to maintain lower levels of debt. We employ four recently developed estimators in dynamic panel-data econometrics: the double-censored fractional estimator (Elsas and Florysiak, 2011), the bias-corrected least-squares dummy-variable estimator (Bruno, 2005), the iterative bootstrap-based bias correction for the fixed-effects estimator (Everaert and Pozzi, 2007), and the fixed-effects quasi-maximum-likelihood estimator (Kripfganz, 2016; Hsiao, et al., 2002). In addition, our panel-data regression results show that in the ICT sector, the leverage ratio exhibits high persistence. Moreover, it positively relates to growth and investment opportunities, firm size, capital investment, and industry median capital structure, and negatively relates to profitability and default risk.

Keywords: ICT industry; agency costs; optimal capital structure, dynamic modeling (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G34 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-03
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-ict
Note: Stephen Miller is the corresponding author
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2019-06

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