Non Linear Speed of Adjustment to Lead Leverage Levels and the Timing Element in Equity Issues: Empirical Evidence from the UK
Hafezali Iqbal Hussain,
Shamsudin Mohd Farid and
Jabarullah Noor H
MPRA Paper from University Library of Munich, Germany
The dynamic trade-off view of capital structure is based on partial adjustment models that find that firms adjust towards target levels. In this paper, we estimate the speed of adjustment based on the first difference of the lead leverage levels (actual lead) and lag leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for UK firms. Consistent with the literature we find that firms adjust the lag (current) leverage levels faster to lead levels when they are above lead levels relative to periods when they are below lead levels. This is due to managerial actions in minimizing present value of bankruptcy costs when firms are over-levered. Bringing in the market timing view of capital structure, we measure deviation of market prices to predicted theoretical values, and find that speed of adjustment is influenced by equity mispricing. We find that firms adjust faster to lead levels when lag levels are above lead levels and the extent of deviation above theoretical values is not excessive relative to when deviations of prices from theoretical levels are too high. Furthermore, looking at firms below lead levels, we find that firms adjust faster to lead levels when equities prices below theoretical values severely deviate; suggesting that firms increase debt issues when equity prices are acutely suppressed. This indicates managers are consistently looking at windows of opportunities when issuing or repurchasing to ensure successful timing attempts. Thus, our findings suggest that although market timing could also work within a trade-off framework where managers are timing based on the deviation from theoretical prices as well as moving towards simulated lead levels, the extent of the integration of both explanations of capital structure remains puzzling.
Keywords: Non-linearity; Speed of adjustment; Timing of equity issues (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-dcm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Published in Journal of Informatics and Mathematical Sciences 1.8(2016): pp. 49-65
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/79261/1/MPRA_paper_79261.pdf original version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:79261
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().