Testing Theories of Capital Structure and Estimating the Speed of Adjustment
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.
Year of publication: |
2009
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Authors: | Huang, Rongbing ; Ritter, Jay R. |
Published in: |
Journal of Financial and Quantitative Analysis. - Cambridge University Press. - Vol. 44.2009, 02, p. 237-271
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Publisher: |
Cambridge University Press |
Description of contents: | Abstract [journals.cambridge.org] |
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