Speed of adjustment towards target leverage: evidence from a quantile regression analysis

Thao Nguyen, Min Bai (), Greg Hou and Cameron Truong

Accounting and Finance, 2021, vol. 61, issue 4, 5073-5109

Abstract: Through employing a quantile regression approach and a dataset of 206,046 firm‐year observations over the period 1970–2017 in the United States market, we examine the heterogeneity and asymmetry in the speed of adjustment (SOA) towards target leverage. We document that high‐ and low‐levered firms adjust more quickly towards their target levels than do mid‐levered firms. This holds true when total leverage and long‐term leverage are considered in the analysis. Second, there is a difference in SOA between low‐ and high‐levered firms, which points to SOA skewness. Third, when short‐term leverage is considered in the analysis, the adjustment speed becomes smaller at varying levels of short‐term debts. Finally, empirical evidence from total leverage and long‐term leverage adjustments is consistent with the trade‐off theory, whereas empirical evidence from short‐term debt adjustments supports the pecking order theory.

Date: 2021
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