Deviations from the Target Capital Structure of Financial Institutions

Target capital structure choice and capital structure adjustment speed vary over time due to the different company characteristics and macroeconomic conditions. Based on the unbalanced panel data of Chinese nonfinancial listed companies from 1997 to 2006, this article builds a partial adjustment capital structure model which endogenize some decisive factors of target capital structure, and the empirical results show that the company's capital structure is significantly influenced by firm-specific characteristics as well as macroeconomic factors, and the adjustment speed of company's capital structure is significantly influenced by macroeconomic factors which are defined by GDP growth rate or term spread. Companies adjust to their target leverage faster in good macroeconomic conditions than in bad macroeconomic conditions.

The purpose of this paper is to test empirically the financing behavior and the adjustment speed of capital structure by information asymmetry in a integrated framework. In this paper, we use firm-size measuring-value of information asymmetry. Target leverage ratio use two way that one is estimated value and the other is average leverage ratio value. The sample of firms comes from the period of 2003∼2007. According to static tradeoff theory, an optimum financial structure exist by the tradeoff between tax saving by debt and bankrupcy costs. The main results of this study can be summarized as follows. First, Korean listed firms pursue the target capital structure. The results of this study show that Korean listed firms have a significant positive degree gap between the target leverage ratios and the actual leverage ratios. This results suggest that firms may have debt financing behavior toward the target capital structure. Second, Korean firms whose the target leverage ratio is above the actual ratio are expected to increase actual leverage ratio to meet target capital structure. Using samples of this category, there are no significant differences of the gap between the target leverage ratios and the actual leverage ratios between large firms and small firms. Low information asymmetry firms are likely to know their target capital structure compare to high information asymmetry firms. Thus, low information asymmetry firms can change the capital structure when they needed. But, the small firms with high information asymmetry have difficulties to know their target capital structure. The insignificant results may comes from their problems of capturing the target capital structure. Third, firms whose target leverage ratio is below the actual ratio are expected to reduce the actual leverage ratio. Using the average ratio as measure of the target ratio, the results indicate that the gap between the target leverage ratios and the actual leverage ratios is significant negative for the large firms of this category. The results suggest that the large firms can easily change the target capital structure compare to the small firms. Fourth, it is expected that high information asymmetry firms tend to borrow money rather than issue corporate bonds due to the costs of issue. However, the results are insignificant. This may be sampling error due to the selection limitation of the listed firms. For the finer measurement of the information asymmetry, various proxies such as analysts reports and the ratio of book and market values are recommended for the further study. Fifth, the adjustment speed of the capital structure for total Korean listed sample firms is close to 0.27. which is similar but lower than the results of the previous Korean listed firms studies. The results show the adjustment speed for the large firms is lower than that of the small firms. The adjustment speed of the capital structure for the large firms close about 24 percents of the gap between their actual and target debt ratio within one year. The adjustment speed of the capital structure for the small firms close about 36 percents of the gap between their actual and target debt ratio within one year. This results suggest that the small firms' adjustment speed of capital structure is faster than the large firms' adjustment speed of capital structure. The results are similar to the previous Korean listed firms studies. However, this is not supported by the hypothesis that the large firms have fast adjustment speed due to the low information asymmetry. When there is a gap between the target leverage ratio and the actual leverage ratio, firms are expected to reduce this gap by taking financing behavior. This paper empirically examined the financing behavior and the adjustment speed of the capital structure for Korean listed firms based on information asymmetry framework. Firm size is used as the proxy for information asymmetry.

This study investigates the role of stock market return in explaining capital structure of Thai firms, the relation between firm attributions and inert behavior in readjusting toward target capital structure, and the longevity of capital structure readjustment toward target capital structure. Our sample group comprises the data on non-fmancial firms listed on the Stock Exchange of Thailand. The period lasts from 1992 to 2002. The result of study reveals that studied firms fail to readjust capital structure toward target capital structure in response to changing market value of firm in both short term and long term. Moreover, it finds a positive association between return on firm asset and tendency of rebounding toward target capital structure and a negative relation between firm size and tendency of rebounding toward target capital structure which can be said that the large or less profitable firms clearly behave more inertly in readjusting capital structure toward target capital structure than the small and more profitable firms. In addition, it can be implied that the observed capital structure is determined mainly and primarily by change of market value of firm stock rather than by attempts at firm value maximization and firms put less significance on optimum capital structure in practice.

Investment framework is one of the most significant components that impact the company’s value. Reliable funding choices for a company generally lead to a capital structure that increases the firm’s value (Abor, 2006). Early studies provide contradictory reviews about a company’s capital structure decisions. This paper investigates the partial adjustment model for a company’s target capital structure. The study also explores how companies operating in different sectors of Pakistani market adjust towards the target capital structure levels. The study also recognizes that an unanticipated share price change also have an effect on the target capital structure. The results indicate that companies do have target leverage and that their adjustment speed varies from sector to sector of the Pakistani market. A typical sector closes more than 50% of the gap between its actual and its target debt ratios within one year.

Capital structure, equity mispricing, and stock repurchases

According to F. A. Hayek, Keynes' General Theory neglects an analysis of the production structure. As a contribution to this research gap, we look at companies' decisions to finance investments and at their agility to adjust their capital structure. We thus study the relationship between capital structure to finance corporate production and shifts in aggregate demand. Target capital structure determinants and speeds of adjustment to these target capital structures will be analyzed for a geographically comprehensive sample of 2,706 companies listed in Asia, Europe and the U.S.A. in the period 1995 – 2009. Aggregate demand turns out to be the coordinating force which determines managers' choices of target capital structures. The speed of adjustments towards target capital structures indicate that firms are agile in adapting to their targets. Our results provide evidence on Keynes' General Theory from a firm level perspective: Firms respond quickly to shifts in aggregate demand by adjusting capital and production structure correspondingly.

Capital structure choice: macroeconomic conditions and financial constraints

Partial Adjustment Toward Target Capital Structures

Employing panel data analysis, the study investigated the impact of risk on speed and costs of adjustments on target leverage on listed firms from the African markets—a panel data set of 2790 observations for 12 years spanning from 2008 to 2019. Based on the results of the Unit root test and Granger causality test, there are bidirectional relationships between risk and capital structure and vice versa. Additionally, Panel DOLS and System GMM were applied for regression and comparison analysis between the African markets and South Africa. The estimates disclose that when companies experience lower risk, the costs of adjustment toward the target are higher. Hence, companies can re‐adjust their capital structure more easily by issuing external capital over periods of stable economic environments, thereby improving their market value. Considering the case of South Africa, the first DOLS results outlined similar estimates compared to the African market. Conversely, when measured with System GMM, the estimates imply that firms incur difficulties in adjusting costs, thus reducing leverage due to unfavorable macroeconomic indicators in line with the pecking order theory stating that in African economies, companies spend more on expenses and adjust their capital structure slowly to reach their optimal target position.

PurposeThe purpose of this paper is to examine the capital structure determinants and speed of adjustment (SOA) toward the target capital structure of firms.Design/methodology/approachThe study has used the generalized method of moments (GMM) model and two-stage least squares (TSLS) to the panel data of 3,310 Indian firms, from January 2000 to March 2018, to determine the adjustment speed toward target capital structure. Further, the study employed a fully modified ordinary least square technique to shed light on the dynamic nature of the adjustment process.FindingsThe results of the GMM estimations indicate that Indian firms are adjusting their capital structure toward the target rate of 10.38 percent per year. Similarly, the findings of TSLS estimate specify a SOA of 15.49 percent per year. The low adjustment speed suggests the prevalence of higher adjustment costs of Indian firms.Research limitations/implicationsFuture research can be undertaken by including certain macroeconomic factors such as GDP, inflation and the interest rate, which also affect the SOA since firms are pretentious by market conditions while designing capital structure for firms.Practical implicationsIn the current financial and regulatory set-up when there are frequent perturbations in the capital market, the study will be valuable for regulators, firms and academicians. The work would enable the concerned stakeholders to manage their scare resources and capital effectively by a better way to make informed decisions. It will facilitate managers of young companies to identify and regulate the factors that are more pertinent for them to make flexible financial decisions concerning the capital structure.Originality/valueThe study amplifies on previous studies and provides new insights on the speed of the adjustment process of Indian firms, helping to modify and refine their capital structures toward the optimum capital structure. This will not only enhance the financial flexibility in the capital structure of Indian corporates but also be of great value to the policymakers and other stakeholders.

Heterogeneous Speeds of Adjustment in Target Capital Structure

Admitindo-se um modelo em que o endividamento das empresas é fortemente influenciado pelo lado da oferta de recursos pelo fato de os credores e investidores (usuários do CAPM e de múltiplos de mercado) avaliarem sua exposição e nível de risco em bases relativas (empresas similares). Esse comportamento induz a estrutura de capital-alvo das empresas ao endividamento mediano do setor, restando aos gestores apenas gerenciar sua estrutura de capital em torno desse valor (folga financeira). Como objetivo, investigou-se o papel da folga financeira, avaliada como uma medida de endividamento relativo, e do endividamento setorial sobre o rebalanceamento da estrutura de capital das empresas. Para tanto, utilizou-se uma amostra inicial de empresas americanas com 32.309 observações-ano para estimar as medianas setoriais de 64 setores e uma subamostra de 5.380 observações, representando ainda 58 setores, para a construção de um painel balanceado por um período de 20 anos. Os resultados do painel dinâmico para o endividamento contábil indicam que o endividamento da empresa tende a acompanhar o endividamento setorial, porém tendem a reverter sua tendência em um período de dois anos. A velocidade de reversão está associada à folga financeira, ou seja, empresas mais distantes do endividamento mediano do seu setor convergem mais rapidamente.

Mechanisms of corporate digital transformation on asymmetric capital structure adjustment-the mediating role of information asymmetry and financial stability.

One of the most contentious issues in the theory of finance has been the theory of capital structure. In recent years, a number of theories have been proposed to explain the variation in debt ratio across firms. The theories suggest that firms select their capital structure depending on attributes that determine the various costs and benefits associated with debt and equity financing. Modigliani e Miller (1958) showed that capital structure decisions do not affect firm value when capital markets are perfect and when corporate and personal taxes do not exist. However, when one or more of the M&M assumptions are relaxed, many authors demonstrate how firm value may vary with changes in the debt-equity mix. Since the discussion regarding to the capital structure of the firms is not finished in financial literature, the aim of this study was to find out what factors are more important when financial executives choose the sources of long term capital that will be used by their companies. For this proposal, a survey instrument was adeveloped and sent to a list of 356 brazilian companies. A total of 40 firms aswered the survey and for this reason, the sample analized in this study is classified as non-probabilistic, and its results can not be representative of the population. This survey showed that 50% of the firms have a target capital structure and 28% follow the Pecking Order Theory. When asked about what is the main motive the affects the debt ratio, 73% of the firms aswered that interest rates are the most important variable that has some influence on the capital structure decision of the company. Other interest results were found in this study and they can help to explain some of the decisions that are taken by financial executives regarding to the capital structure of their firms.

The empirical literature provides conflicting assessments about how firms choose their capital structures. Distinguishing among the three main hypotheses (‘‘tradeoff’’, pecking order, and market timing) requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have applied empirical specifications that fail to recognize the potential for incomplete adjustment. A more general, partial-adjustment model of firm leverage indicates that firms do have target capital structures. The typical firm closes about one-third of the gap between its actual and its target debt ratios each year.