Journal of Financial and Quantitative Analysis Vol. 44 No. 2 2009
Testing Theories of Capital Structure and Estimating the Speed of Adjustment
Abstract
This paper examines time-series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms’ capital structures through their influence on firms’ historical financing decisions. We also introduce a new econometric technique to deal with biases in estimates of the speed of adjustment toward target leverage. We find that firms adjust toward target leverage at a moderate speed, with a half-life of 3.7 years for book leverage, even after controlling for the traditional determinants of capital structure and firm fixed effects.
- DOI
- 10.1017/s0022109009090152
- Volume
- 44
- Issue
- 2
- Pages
- 237-271
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref