The Debt-Equity Choice of Japanese Firms

Daniel Tak Yan Law and Feng Yao
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Daniel Tak Yan Law: The Chinese University of Hong Kong, Department of Economics
Feng Yao: West Virginia University, College of Business and Economics

No 13-09, Working Papers from Department of Economics, West Virginia University

Abstract: Prior studies on the debt-equity choice of firms focus on capital market oriented economies. This paper examines whether firms in Japan, the world's largest bank-oriented economy, adjust their debt-equity choice towards the target. We find that the leverage rations of Japanese firms do adjust slowly towards their target levels. The adjustment speed has dwindled after the Asian Financial Crisis. In contrast to existing literature, we show that an increase in tangible assets reduces the leverage ratio of firms in Japan. It is also found that the effect of financial deficit is persistent while the market timing effect is not.

Keywords: Debt-equity choice; Pecking Order Theory; Market Timing Theory; Trade-Off Theory (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-12
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