A note on capital structure target adjustment – Indonesian evidence

Ludwig Reinhard and Steven Li

International Journal of Managerial Finance, 2010, vol. 6, issue 3, 245-259

Abstract: Purpose - The purpose of this paper is to investigate whether existing capital structure target adjustment models are able to identify whether companies adjust their capital structures towards an (unobservable) target. Design/methodology/approach - Existing capital structure target adjustment models are applied to a specific dataset by using different regression techniques (ordinary least square, fixed effect, Fama‐MacBeth, least square dummy variable “corrected”, SYS‐GMM). Findings - Existing capital structure target adjustment models are not able to identify whether companies adjust their capital structures towards a target or not. They might indeed indicate target adjustment behaviour when companies' capital structures actually move away from their targets. Research limitations/implications - As target adjustment behaviour is often used as support for the trade‐off and against the pecking order theory, the “horse race” between both theories seems still to be open. Originality/value - This paper highlights some of the fallacies of existing capital structure target adjustment models and demonstrates that the results obtained by those models can be highly misleading.

Keywords: Capital structure; Targets; Indonesia (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:6:y:2010:i:3:p:245-259

DOI: 10.1108/17439131011056242

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