What Determines the Speed of Adjustment to the Target Capital Structure?

Wolfgang Drobetz and Gabrielle Wanzenried

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: We use a dynamic adjustment model and panel methodology to investigate the determinants of a time-varying optimal capital structure. Because firms may temporarily deviate from their optimal capital structure in the presence of adjustment costs, we also endogenize the adjustment process. In particular, we analyze the effects of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target leverage. Our sample comprises a panel of 90 Swiss firms over the years 1991 to 2001. We find that faster growing firms and those that are further away from their optimal capital structure adjust more readily. Our results also reveal interesting interrelations between the adjustment speed and popular business cycle variables. For example, the speed of adjustment is higher when the term spread is higher, i.e., when economic prospects are good

Keywords: Capital structure; dynamic adjustment; business cycle; panel data (search for similar items in EconPapers)
JEL-codes: C23 E44 G32 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (4)

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