Dynamic Capital Structure of Japanese Firms: How Far Has the Reduction of Excess Leverage Progressed in Japan?

Shinichi Nishioka and Naohiko Baba
Additional contact information
Shinichi Nishioka: Bank of Japan
Naohiko Baba: Bank of Japan

No 04-E-16, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper investigates the dynamics of capital structure of Japanese firms since the early 1990s to shed light on how far the reduction of excess leverage has progressed so far in Japan. Our main findings are as follows. First, the trade-off theory provides an appropriate framework to assess this issue after controlling for various variables as proxies for other hypotheses including governance structure, the pecking order theory, and market timing hypothesis. Among such variables, profitability as a proxy for the pecking order theory has significant explanatory power. Second, governance structure significantly influences the speed at which firms adjust their leverage ratios toward optimal ones. In particular, the higher the shareholding ratio of overseas investors, the more quickly market-value leverage ratios adjust. Third, implied excess leverage ratios show a marked contrast between the firms in good credit standing and others. Reduction of excess leverage by highly-rated firms has substantially progressed so far, while others still have a long way to go.

Keywords: Capital Structure; Leverage; Trade-off Theory; Pecking Order; Corporate Governance; Market Timing; Panel Data; Dynamic GMM (search for similar items in EconPapers)
JEL-codes: C23 G32 (search for similar items in EconPapers)
Date: 2004-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.boj.or.jp/en/research/wps_rev/wps_2004/data/wp04e16.pdf (application/pdf)

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:boj:bojwps:04-e-16

Access Statistics for this paper

More papers in Bank of Japan Working Paper Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().