Capital structure adjustment in Latin American firms: An empirical test based on the Error Correction Model

Jorge A. Munoz Mendoza (), Carlos Delgado (), Carmen L. Veloso Ramos (), Sandra M. Sepúlveda Yelpo (), Edinson E. Cornejo Saavedra () and Diego A. Erices Olivera ()

Estudios Gerenciales, 2023, vol. 39, issue 166, 50-66

Abstract: The objective of this article is to analyze the capital structure adjustment of Latin American firms through the pecking order and trade-off theories using a sample of 975 non-financial firms for the period 2000-2017. The results support the existence of a target capital structure. Adjustment speeds ranged between 48.9% and 74.3% and generate a rapid convergence of leverage towards its target level. Financial deficits explained less than half of the changes in debt, which contradicts the pecking order theory. The results of the error correction model indicated that companies dynamically deviate from their long-term capital structure. The convergence speeds in the partial adjustment model increased up to 69.5% and 91.7% with the error correction method. These results are relevant for firms and investors.

Keywords: pecking order; trade-off; capital structure; adjustment; leverage (search for similar items in EconPapers)
JEL-codes: G31 G32 G34 (search for similar items in EconPapers)
Date: 2023
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https://doi.org/10.18046/j.estger.2023.166.5432

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Persistent link: https://EconPapers.repec.org/RePEc:col:000129:020674

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