Asymmetric Capital Structure Adjustments: New Evidence from Dynamic Panel Threshold Models

By Vi Dang, Min-Joo Kim, Yongcheol Shin. 2012

229 citations recorded by the source corpus.

We develop a dynamic panel threshold model of capital structure to test the dynamic trade-off theory, allowing for asymmetries in firms' adjustments toward target leverage. Our novel estimation approach is able to consistently estimate heterogeneous speeds of adjustment in different regimes as well as to properly test for the threshold effect. We consider several proxies for adjustment costs that affect the asymmetries in capital structure adjustments and find evidence that firms with large financing imbalance (or a deficit), large investment or low earnings volatility adjust faster than those with the opposite characteristics. Firms not only adjust at different rates but also seem to adjust toward heterogeneous leverage targets. Moreover, we document a consistent pattern that firms undertaking quick adjustment are over-levered with a financing deficit and rely heavily on equity issues to make such adjustment.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/f687cdb714ed1506310b07a8a259438965392b3f

Citations in the corpus

• In Search of Robust Methods for Dynamic Panel Data Models in Empirical Corporate Finance (2015, unknown): “Third, in empirical research, firms with different characteristics may have different response coefficients and adjust towards their long-term optimal financial policies at different rates (e.g., Byoun, 2008; Dang et al., 2012; Faulkender et al., 2012).”
• Dynamic panels with threshold effect and endogeneity (2016, unknown): “Recently, some progress has been made, e.g., Dang et al. (2012), Kremer et al. (2013) and Ramirez-Rondan (2013).”