We thank two anonymous referees, Manuel Rocha Armada, Gonul Colak, Ettore Croci, John Doukas (the editor), Yilmaz Guney, Ottorino Morresi, and Tatjana Puhan as well as participants of the 2012 Financial Management Association (FMA) European Conference in Istanbul, the 2013 Midwest Finance Association (MFA) meeting in Chicago, and the 2014 European Financial Management (EFMA) Annual Meeting in Rome for helpful comments. Correspondence: Henning Schröder.
Heterogeneity in the Speed of Capital Structure Adjustment across Countries and over the Business Cycle
Article first published online: 22 JUL 2014
© 2014 John Wiley & Sons Ltd
European Financial Management
How to Cite
Drobetz, W., Schilling, D. C. and Schröder, H. (2014), Heterogeneity in the Speed of Capital Structure Adjustment across Countries and over the Business Cycle. European Financial Management. doi: 10.1111/eufm.12048
- Article first published online: 22 JUL 2014
- capital structure;
- speed of adjustment;
- institutional arrangements;
- business cycle;
- dynamic panel methods
This study analyses 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 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 business cycle effect on adjustment speed is most pronounced for financially constrained firms in market-based countries.