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Publication Heterogeneity in the speed of capital structure adjustment across countries and over the business cycle

Type

Refereed Article

Year

2015

Author(s)

Wolfgang Drobetz
Dirk C. Schilling
Henning Schröder

Journal

European Financial Management

Volume

21

Pages

939-973

Research Area

Corporate Finance

Keywords

Capital structure, Speed of adjustment, Institutional arrangements, Business cycle, Dynamic panel methods

Abstract

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.

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