The dynamic trade-off theory of capital structure: evidence from a panel of US industrial companies
Purpose This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly listed US industrial firms over the period from 2013 to 2019. It analyzes the existence of an adjustment of lever...
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Published in | Studies in economics and finance (Charlotte, N.C.) Vol. 41; no. 4; pp. 902 - 922 |
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Main Author | |
Format | Journal Article |
Language | English |
Published |
Bradford
Emerald Publishing Limited
23.07.2024
Emerald Group Publishing Limited |
Subjects | |
Online Access | Get full text |
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Summary: | Purpose
This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly listed US industrial firms over the period from 2013 to 2019. It analyzes the existence of an adjustment of leverage toward its target level and whether the speed of this adjustment is influenced by the debt measure, the model specification or/and the fact that the actual debt ratio is higher or lower than its long-term target level.
Design/methodology/approach
This paper uses a quantitative research methodology using panel data analysis under the partial adjustment model and the error correction model using the generalized moment method in first differences and in systems to explore the dynamic nature of firms’ capital structure behavior.
Findings
The results show that the effects of the conventional determinants of leverage are globally consistent with the trade-off theory predictions. The dynamic versions confirm that firms exhibit leverage-targeting behavior. Although this speed of adjustment (SOA) depends on the debt and model specifications, it is around 60% on average. The estimated SOA is higher for the market leverage measure compared to the book leverage. The asymmetric adjustment model reveals that firms are more sensitive to reducing leverage than increasing it when they are away from their target; overleveraged firms exhibit approximately 5% faster adjustment than underleveraged firms when book leverage is used.
Originality/value
The originality of this research paper lies in its development and test of an asymmetric model to allow the leverage adjustment speed to vary depending on whether the firm’s debt ratio is above or below its target level and the methodological approach as well as the different model specifications used and the insights generated through the application of rigorous econometric techniques. |
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ISSN: | 1086-7376 1086-7376 1755-6791 |
DOI: | 10.1108/SEF-04-2023-0200 |