Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM

2021 ◽  
Author(s):  
Pankaj Sinha ◽  
Sandeep Vodwal
Keyword(s):  
Partial Adjustment ◽  
System Gmm ◽  
Target Leverage

Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence

2017 ◽  
Vol 6 (1) ◽  
pp. 27-41 ◽  
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
Capital Structure ◽  
Ownership Structure ◽  
Agency Conflicts ◽  
Partial Adjustment ◽  
Leverage Ratio ◽  
Financial Firms ◽  
Structure Adjustment ◽  
Adjustment Speed ◽  
Net Benefits ◽  
Target Leverage

This study examines the asymmetries in capital structure adjustment speed depending on firms’ affiliation to business groups. Using partial adjustment framework on a dataset of 2001 listed Indian non-financial firms over the period of 2005–2013, it was found that Indian firms annually adjusted about 37 percent of their deviation from target leverage. Groups firms, in general, adjust their leverage ratio slower than the stand-alone firms, suggesting lesser net benefits of adjustment for the former than the latter. The results are persistent irrespective of firms’ extent of deviation from their target leverage. However, the net benefits of adjustment and consequently the adjustment speed for both the groups of firms, irrespective of their extent of deviation from target leverage, seem to be alike, when they are over-levered and lower for group firms than the stand-alone firms, when they are under-levered. These findings indicate that both group and stand-alone firms face identical threats, when they are over-levered, whereas group firms possibly have alternative arrangements to reduce the owner–manager agency conflicts and tax liability, when they are under-levered. These findings are expected to prove helpful for financial managers in designing their capital structure based on ownership structure, and the nature and extent of deviation from the target leverage.

The Dynamic Adjustment of China's Manufacturing Listed EnterprisesDebt Ratio - A Study Based on System GMM Estimation

2013 ◽  
Vol 694-697 ◽  
pp. 3535-3539 ◽  
Author(s):  
Lei Zhang ◽  
Bang Yuan Wu ◽  
Liang Wang
Keyword(s):  
Adjustment Costs ◽  
Dynamic Panel Data ◽  
Debt Ratio ◽  
Dynamic Adjustment ◽  
Dynamic Panel ◽  
Partial Adjustment ◽  
Trade Off ◽  
System Gmm ◽  
Adjustment Speed ◽  
Dynamic Perspective

The paper studies on adjustment conduct of Chinas manufacturing listed enterprises debt ratio from a dynamic perspective,and uses system GMM method to estimate focuses on 336 Chinas manufacturing listed enterprises dynamic panel data from 2002 to 2008. Results show that Chinas manufacturing listed enterprises have strong rationality and objective optimal debt ratio level. Companies can only make partial adjustment after deviating from optimal debt ratio level because of the adjustment costs,the adjustment speed is about 0.12,the corresponding adjustment half-period is 3.15 years,which is consistent with the traditional static trade-off theory.

Firm Profitability and Adjustment of Capital Structure: Indian Evidence

2019 ◽  
Vol 23 (3) ◽  
pp. 297-308
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Adjustment Process ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Partial Adjustment ◽  
Listed Firms ◽  
Indian Context ◽  
Adjustment Speed ◽  
Target Leverage

The present study investigates the relevance of capital structure dynamics in Indian context by examining the speed at which firms adjust towards their target capital structure. Apart from symmetric adjustment speed, the study also investigates the asymmetries in adjustment speed based on profitability of firms. Using partial adjustment framework on an unbalanced panel of 28,532 firm-year observations comprising 2,718 listed firms over a period of 2004–2005 to 2015–2016, the study finds that Indian firms maintain target leverage and adjust towards the same with a moderate annual adjustment speed of around 32 per cent. The study further observes that high-profitability firms, in general, adjust significantly faster than low-profitability firms which possibly indicate better accessibility in the financial market, lesser costs of adjustments and ability to adjust payout ratio for the former than the latter. Further investigation reveals that high-profitability firms make more adjustment in case of over-leverage, whereas low-profitability firms make more adjustment in case of under-leverage. These results possibly indicate the implications of availability of internally generated funds. Overall, the study concludes that adverse selection cost plays important role in the target adjustment process and hence, both trade-off theory and pecking order theory have relevance in Indian context.

The capital structure dynamics of Malaysian firms: timing behavior vs adjustment toward the target

2017 ◽  
Vol 13 (3) ◽  
pp. 226-245 ◽  
Author(s):  
Islam Abdeljawad ◽  
Fauzias Mat Nor
Keyword(s):  
Capital Structure ◽  
Ownership Structure ◽  
Timing Behavior ◽  
Partial Adjustment ◽  
Content Type ◽  
Financing Decisions ◽  
Partial Adjustment Model ◽  
The Cost ◽  
Target Leverage ◽  
The Capital Structure

Purpose The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision. Design/methodology/approach This study used the GMM system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment (SOA) of capital structure. Findings This study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7 percent annually and this rate increased to 14.2 percent when the timing variable is accounted for. Moreover, the SOA is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market. Research limitations/implications The findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research. Originality/value This study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation support the conclusion that firms consider both targeting and timing in their financing decisions. This study provides evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. Therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm.

scholarly journals Targeting Behavior among Indonesian Firms: Two-Step Partial Adjustment Model Analysis

2019 ◽  
Vol 10 (1) ◽  
pp. 92-101
Author(s):  
Dwi Cahyaningdyah
Keyword(s):  
Stock Exchange ◽  
Financial Industry ◽  
Partial Adjustment ◽  
Financial Decisions ◽  
Speed Of Adjustment ◽  
Current Period ◽  
Adjustment Model ◽  
Partial Adjustment Model ◽  
Target Firms ◽  
Target Leverage

In this research, we tested the heterogeneity of speed of adjustment toward target leverage among industries on the Indonesian stock exchange by using two-step partial adjustment model. The sample collected from 2007-2016 and consisted of firms in eight sectors, i.e. agriculture, mining, basic industries, miscellaneous, consumer goods, property and real estate, infrastructure, utilities and transportation as well as trade, services and investment sectors. Firms in the financial industry are excluded because the capital structure of firms in the financial industry reflects specific regulations and are not independent firms’ policies. The results showed that speed of adjustment ranged from 61% - 45% for book leverage and 67% - 43% for market leverage. This significant speed of adjustment is consistent with trade-off theory, which states that firms have target leverage and when firms are deviated from the target, firms will make financial decisions that will close the gap between previous year’s leverage and the target leverage of current period.

scholarly journals MANAGING THE GAP BETWEEN ACTUAL AND TARGET CAPITAL STRUCTURE: AN EVIDENCE FROM PAKISTAN

2019 ◽  
Vol 1 (2) ◽  
pp. 1-8
Author(s):  
ABDUL RAFAY ◽  
USMAN JAVED GILANI ◽  
FARRUKH IJAZ
Keyword(s):  
Capital Structure ◽  
Price Change ◽  
Share Price ◽  
Partial Adjustment ◽  
Adjustment Model ◽  
Partial Adjustment Model ◽  
Adjustment Speed ◽  
One Year ◽  
Target Leverage ◽  
A Company

Investment framework is one of the most significant components that impact the company’s value. Reliable funding choices for a company generally lead to a capital structure that increases the firm’s value (Abor, 2006). Early studies provide contradictory reviews about a company’s capital structure decisions. This paper investigates the partial adjustment model for a company’s target capital structure. The study also explores how companies operating in different sectors of Pakistani market adjust towards the target capital structure levels. The study also recognizes that an unanticipated share price change also have an effect on the target capital structure. The results indicate that companies do have target leverage and that their adjustment speed varies from sector to sector of the Pakistani market. A typical sector closes more than 50% of the gap between its actual and its target debt ratios within one year.

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