Is the Partial Adjustment Model a Useful Tool for Capital Structure Research?

Armen Hovakimian and Guangzhong Li

Review of Finance, 2010, vol. 16, issue 3, 733-754

Abstract: Recent research has focused on the estimates of the speed of adjustment to target leverage as the indicators of the importance of dynamic trade-off behavior. We show that the observed corporate financing behavior and the resulting dynamics of corporate debt ratios are such that the speed of adjustment is not an economically meaningful measure of the importance of target debt ratios. We conclude that partial adjustment regressions that rely on the existence of a well-defined target debt ratio are ill-suited for quantifying the importance of dynamic trade-off behavior vis-a-vis alternative theories. Copyright 2010, Oxford University Press.

Date: 2010
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