TESTING CAPITAL STRUCTURE THEORIES USING ERROR CORRECTION MODELS: EVIDENCE FROM THE UK, FRANCE AND GERMANY

Viet Anh Dang ()
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Viet Anh Dang: manchester Business School - University of Manchester [Manchester]

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Abstract: We employ an error correction model of leverage to test the trade-off and pecking order theories of capital structure for firms in the UK, France and Germany. The error correction framework extends the partial adjustment model by explicitly modelling changes in target leverage and past deviations from such target as determinants of firms' dynamic leverage adjustment process. We also augment our empirical models to test the pecking order theory. Using appropriate and advanced dynamic panel data methods, we find that UK, French and Germany firms adjust towards target leverage quickly in both the partial adjustment and error correction models, which is consistent with the trade-off theory. We further show that the trade-off theory explains these firms' capital structure decisions better than the pecking order theory in the models nesting the two theories.

Keywords: Social; Sciences; &; Humanities (search for similar items in EconPapers)
Date: 2011-09-15
Note: View the original document on HAL open archive server: https://hal.science/hal-00732527
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Published in Applied Economics, 2011, 45 (02), pp.171-190. ⟨10.1080/00036846.2011.597724⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00732527

DOI: 10.1080/00036846.2011.597724

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