Firms' dynamic adjustment to target capital structures in transition economies

Ralph de Haas () and H.M.M. Peeters

WO Research Memoranda (discontinued) from Netherlands Central Bank, Research Department

Abstract: We study the capital structure dynamics of Central and Eastern European firms in order to get a better understanding of the quantitative and qualitative development of the financial systems in this region. The dynamic model we use endogenizes the target leverage as well as the adjustment speed and is applied to microeconomic data for ten countries. We find that during the transition process firms generally increased their leverage, lowering the gap between actual and target leverage. Profitability and age are the most robust determinants of capital structure targets. Older firms attract more bank debt, whereas profitability decreases firms' leverage targets. While banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still important. As a result, firms prefer internal finance to bank debt (pecking order behaviour) and adjust leverage only slowly.

Keywords: capital structure dynamics; transition economies; financial system development (search for similar items in EconPapers)
JEL-codes: C23 G32 O57 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: Written 2004-05
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:wormem:761

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