|Publication||Heterogeneity in the speed of capital structure adjustment across countries and over the business cycle|
European Financial Management
Capital structure, Speed of adjustment, Institutional arrangements, Business cycle, Dynamic panel methods
This study analyzes the heterogeneity in the speed of capital structure adjustment. Using a doubly-censored Tobit estimator that accounts for mechanical mean reversion in leverage ratios, the speed of adjustment is 25% per year in a large international sample, supporting the economic relevance of the trade-off theory. Differences in the adjustment speed across distinct financial systems are attributable to differences in the costs of adjustment. Macroeconomic and micro-level supply-side constraints also affect the dynamics of leverage. Firms adjust more slowly during recessions, and the effect on adjustment speed is most pronounced for financially constrained firms in market-based countries.