Heterogeneity in capital structure adjustment revisited: Default versus non-default firms and short versus long time horizon

Jayasuriya Mahapatabendige Ruwani Fernando, Leon Li and Greg Hou

International Review of Economics & Finance, 2021, vol. 76, issue C, 185-204

Abstract: This paper reexamines the issue of the heterogeneity of the speed of capital structure adjustment in firms. In contrast to previously documented contemporaneous results, we test the issue by making a distinction between default and non-default firms and employ two measures of the speed of adjustment (cumulative versus marginal). Our empirical results show that the speed of adjustment is non-uniform across firms and over time. In particular, default firms are associated with a higher speed of adjustment than non-default firms. The completion of leverage adjustment takes multiple periods. The marginal speed of adjustment accelerates from the beginning period to the end period, which is consistent with the anchoring and adjustment bias heuristic. Our empirical results are robust to using a book/market leverage, a two-/one-step estimation approach as well as the consideration of panel length, non-financial debt, zero-leverage firms, and endogeneity.

Keywords: Capital structure; Speed of adjustment; Default firms; Cumulative adjustment; Marginal adjustment (search for similar items in EconPapers)
JEL-codes: C12 G21 G31 G33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:76:y:2021:i:c:p:185-204

DOI: 10.1016/j.iref.2021.06.001

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