Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

Flávio Morais, Zélia Serrasqueiro and Joaquim J.S. Ramalho

Research in International Business and Finance, 2022, vol. 62, issue C

Abstract: This paper investigates whether leveraged and zero-leverage firms pursue or not a debt target level and, if so, how fast they adjust to that target. We also investigate how the influence of firms’ debt policy on capital structure speed of adjustment (SOA) changes with different financial systems, macroeconomic conditions, financial constraints and financial flexibility levels. Using the dynamic panel fractional estimator and a sample of European listed firms for the 1995–2016 period, we find that both zero-leverage and leveraged firms actively adjust to a target debt ratio. We also find that, in general, leveraged firms display a significantly higher SOA than zero-leverage firms (27.6 % vs. 22.1 %), with only two exceptions: there are no significant differences when the analysis is restricted to financially constrained firms; and during the 2008 financial crisis zero-leverage firms adjusted significantly faster (46.8 %) than leveraged firms (25.6 %) and relative to non-crisis years (21.6 %).

Keywords: Zero leverage; Speed of adjustment; Financial system; European crises; DPF estimator (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922000708

DOI: 10.1016/j.ribaf.2022.101682

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