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Asymmetric adjustment toward optimal capital structure: Evidence from a crisis

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JournalInternational Review of Financial Analysis
DatePublished - May 2014
Number of pages17
Pages (from-to)226-242
Original languageEnglish


We employ dynamic threshold partial adjustment models to study the asymmetries in firms’ adjustments toward their target leverage. Using a recent sample of US firms over the period 2002–2012, we document a significantly negative impact of the Global Financial Crisis on the speed of leverage adjustment. In our subperiod analysis, we find moderate evidence of cross-sectional heterogeneity in this speed, which is generally more pronounced pre-crisis and provides little support for the financial constraint view. For the pre-crisis period, more constrained firms, such as those with high growth, with large investment, of small size, and with volatile earnings, adjust their capital structures more quickly than their less constrained counterparts. These results seem more in line with the argument that firms have higher adjustment speeds thanks to lower adjustment costs that can be shared with the transaction costs incurred to raise external funds. For the crisis period, the speed of adjustment only varies cross-sectionally with the deviation from target leverage, with only firms having sufficiently large deviations attempting to revert to the target, albeit at slow rates. Overall, our results provide new evidence of both cross-sectional and time-varying asymmetries in capital structure adjustments, which is consistent with the trade-off theory.

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