Incorporating active adjustment into a financing based model of capital structure |
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Institution: | 1. Department of Cardiology, The First Affiliated Hospital, Zhejiang University, School of Medicine, Hangzhou 310003, PR China;2. Department of Cardiology, Ningbo Medical Treatment Center Lihuili Hospital, Ningbo 315000, PR China |
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Abstract: | The conventional partial adjustment model, which focuses on leverage evolution, has difficulty identifying deliberate capital structure adjustments as it confounds financing decisions with the mechanical autocorrelation of leverage. We propose and estimate a financing-based partial adjustment model that separates the effects of financing decisions on leverage evolution from mechanical evolution. The speed of adjustment (SOA) is firm-specific and stochastic, and active targeting of capital structure has a multiplier effect that depends on the size of financial deficit. Overall, we find expected SOA from active rebalancing (30%) more than doubles what is expected from mechanical mean reversion alone (13%). |
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Keywords: | Capital structure Trade-off theory Partial adjustment model Target financing model Random financing Speed of adjustment G3 G30 G31 G32 C5 C52 |
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