Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization

Charith B. Gamage

Journal of International Money and Finance, 2023, vol. 131, issue C

Abstract: Do firms change their capital structure adjustment speed towards a target when adjustment costs change? Under a unified capital structure approach that combines the static trade-off and pecking order theories, firms minimize adjustment costs in setting their target adjustment speed. For below-target firms, the availability of share repurchases lowers the expected cost of increasing leverage towards the target. Extending the adjustment cost-based unified framework to the availability of share repurchases, which exogenously lowers the expected cost of leverage increases for below-target firms, I show the availability of share repurchases to result in these firms increasing their leverage adjustment speed towards a target. As predicted, this effect does not hold for the above-target firms.

Keywords: Adjustment costs; Target adjustment speed; Share repurchases (search for similar items in EconPapers)
JEL-codes: G32 G35 G38 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001760

DOI: 10.1016/j.jimonfin.2022.102773

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