Testing Target-Adjustment and Pecking Order Models of Capital Structure and Estimating Speed of Adjustment: Evidence from Borsa Istanbul (BIST)

This article examines the explanation power of the pecking order and target adjustment models on 148 Borsa Istanbul (BIST) firms' capital structure over the period of 2005 to 2015. The article also estimates the speed of adjustment (SOA) to the targeted leverage level. Although a firm's capital structure is jointly determined by both theories, target adjustment model appear to have relatively higher power in explaining capital structures of BIST firms. Estimates of the adjustment speeds suggests that firms move toward their target debt ratios at a fast pace. Adjustment speeds estimated with market leverage were significantly higher (44% - 83%). Share price volatility was found to have a rather short-term impact on market leverage. Firms rapidly revert back to their targets and offset these fluctuations within few years. Adjustment speed estimates vary with the estimation method. System generalized methods of moment estimator (GMM-SYS) provided the slowest SOA estimation whereas firm-fixed effects estimators imparted the fastest adjustment speed.