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Capital Structure Deviation and Speed of Adjustment
The Financial Review, Eastern Finance Association
  • Tarun Mukherjee, University of New Orleans
  • Wei Wang, Cleveland State University
Document Type
Publication Date
  • Strategic Management
As a firm deviates from its target leverage, marginal bankruptcy costs change at a faster speed than marginal tax shield. This renders the speed of adjustment (SOA) of capital structure an increasing function of the starting deviation from the target. Adopting a bootstrapping-based estimation, we confirm the existence of such heterogeneity in SOA that is statistically significant and economically nontrivial. Typically, if Firm A is one standard deviation (about 17%) and Firm B is two standard deviations away from their leverage targets, then B’s SOA is 41% greater than that of A, and the half life of B’s leverage deviation is shorter by 2.5 years. The findings are consistent with the dynamic tradeoff theory in the presence of reasonable adjustment costs.
Citation Information
Mukherjee, T., Wang, W. (2013). Capital Structure Deviation and Speed of Adjustment. The Financial Review, Eastern Finance Association, 48, pp.597-615.