Estimating the Speed of Adjustment of Leverage in the Presence of Interactive Effects*

The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions

Joakim Westerlund, Hande Karabiyik, Paresh Kumar Narayan and Seema Narayan ()

Journal of Financial Econometrics, 2022, vol. 20, issue 5, 942-960

Abstract: Dynamic panel data regression models with fixed effects to account for unobserved heterogeneity are standard econometric tools. It is not until recently, however, that the problems involved when fitting such regressions to leverage data have been investigated. The main problem is that models of leverage are extremely noisy, much more so than what can be accommodated using fixed effects. The present article can be seen as a reaction to this. The purpose is to consider a more general interactive effects model in which there are multiple time effects, each with their own firm-specific sensitivities. Our empirical results suggest that proper accounting for the interactive effects and the bias that they cause leads to a marked increase in the estimated speed of adjustment to target leverage.

Keywords: bias; capital structure; cross-section correlation; dynamic panel data; interactive effects; leverage (search for similar items in EconPapers)
JEL-codes: C23 G30 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbab002 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:20:y:2022:i:5:p:942-960.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().