*We thank Sudipto Dasgupta for many insightful comments. All errors are our responsibility.
Heterogeneity in the Speed of Adjustment toward Target Leverage*
Article first published online: 28 APR 2011
© 2011 The Authors. International Review of Finance © International Review of Finance Ltd. 2011
International Review of Finance
Special Issue: FINANCING AND CAPITAL STRUCTURE: PART II
Volume 11, Issue 2, pages 181–211, June 2011
How to Cite
ELSAS, R. and FLORYSIAK, D. (2011), Heterogeneity in the Speed of Adjustment toward Target Leverage. International Review of Finance, 11: 181–211. doi: 10.1111/j.1468-2443.2011.01130.x
- Issue published online: 9 JUN 2011
- Article first published online: 28 APR 2011
Estimating the speed of adjustment toward target leverage using the standard partial adjustment model assumes that all firms within the sample adjust at the same (average) pace. Dynamic capital structure theory predicts heterogeneity in adjustment speed due to firm-specific adjustment costs. Applying an estimator designed to be unbiased in the context of unbalanced dynamic panel data with a fractional dependent variable (DPF estimator), we conduct an extensive analysis of cross-sectional heterogeneity in the speed of adjustment of firms. We find evidence for pronounced heterogeneity, where speed of adjustment is the highest for firms with high default risk or expected bankruptcy costs, and if opportunity costs of deviating from a target are high. Our evidence is consistent with the general relevance of the trade-off theory.