Capital structure adjustment behavior of listed firms on the Mexican stock exchange

• Published in: Journal of economics and finance Vol. 45; no. 4; pp. 573 - 595
• Main Authors: Trejo-Pech, Carlos Omar, Kyaw, NyoNyo A., He, Wei
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.10.2021; Springer Nature B.V
• Subjects: Bankruptcy; Capital markets; Capital structure; Costs; Developing countries; Economic development; Economics; Economics and Finance; Finance; Industrialized nations; LDCs; Macroeconomics; Macroeconomics/Monetary Economics//Financial Economics; Proxies; Ratios; Risk premiums; Latin America; G32; Leverage adjustment speed; Capital structure in developing economies; G3; Capital structure; Mexican firms; Leverage and macroeconomic conditions
• ISSN: 1055-0925; 1938-9744
• DOI: 10.1007/s12197-021-09555-7

We employ partial adjustment capital structure models to examine Mexican publicly traded firms’ capital structure adjustment behavior. In a partial adjustment model, a firm reverts its observed leverage towards target leverage and closes a proportion of the deviation from target within one year. The leverage speed of adjustment (SOA) depends on the trade-off between the costs and benefits of moving leverage towards target. The faster a firm can revert its leverage when shocked away from target, the higher the firm value. Our results show that Mexican firms’ SOA ranges from 13.8% to 17.4%, depending on three leverage proxies. Mexican firms revert their leverage towards target at a slower speed than firms in developed countries do, implying that Mexican firms operate sub-optimally longer than firms in developed countries. We also compare subsets of firms with characteristics that are expected to affect SOA. First, we find that financially unconstrained firms’ SOA is higher than the SOA of financially constrained firms. Second, for two out of the three leverage proxies, the SOA of over-levered firms is higher than that of under-levered firms. Third, farthest-away-from-target firms adjust faster toward target leverage than closest-to-target firms. Overall, our findings confirm the expected asymmetric SOA behavior of the subsets of companies examined. Finally, we examine the impact of states of the economy on firms’ capital structures. We find that leverage ratios of Mexican firms are counter-cyclical and that Mexican firms adjust leverage at faster speed during good economic states as measured by stock exchange market capitalization relative to country’s GDP, risk premium, and inflation.