Adjustment Costs and the Realization of Target Leverage of Spanish Public Firms

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

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Corporate Leverage and the Dynamics of Its Components

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109019001042 ◽

2019 ◽

pp. 1-32

Author(s):

Armen Hovakimian ◽

Gayané Hovakimian

Keyword(s):

Time Series ◽

Credit Ratings ◽

Adjustment Costs ◽

Cross Sectional ◽

Trade Off ◽

The Cross ◽

Target Leverage

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas time-series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, or more focused or that have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

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Environmental Reporting and Speed of Adjustment to Target Leverage: Evidence from a Dynamic Regime Switching Model

Organizacija ◽

10.2478/orga-2020-0002 ◽

2020 ◽

Vol 53 (1) ◽

pp. 21-35 ◽

Cited By ~ 1

Author(s):

Hafezali Iqbal Hussain ◽

Sebastian Kot ◽

Hassanudin Mohd Thas Thaker ◽

Jason J Turner

Keyword(s):

Regime Switching ◽

Firm Value ◽

Adjustment Costs ◽

Adjustment Cost ◽

External Financing ◽

Environmental Reporting ◽

Switching Model ◽

Speed Of Adjustment ◽

Target Leverage ◽

The Impact

AbstractBackground and Purpose: This study investigates the impact of environmental reporting on speed of adjustment and adjustment costs which is evaluated based on the ability of firms to adjust to target leverage level for non-financial firms listed in the Malaysian Stock Exchange (Bursa Malaysia).Design/Methodology/ Approach: The study selects Malaysian firms based on the contracting and political cost of the economy which is seen as a relationship-based economy. This in turn influences a firm’s ability to obtain external financing and thus has an important impact on capital structure decisions. In addition, the method employed allows for a direct measure on adjustment cost for firms. The current study utilises a dynamic regime switching model based on the DPF estimator to estimate rate of adjustment to optimal target levels based on the distinction of environmental reporting of public listed firms. The approach allows statistical inferences to control for potential serial correlation, endogeneity and heterogeneity concerns which accounts for firm specific characteristics.Results: The empirical findings suggest voluntary disclosure on environmental reporting increases a firm’s ability to access external financing at a cheaper cost as evidenced by a more rapid rate of adjustment. The findings are consistent across differing endogenous and exogenous factors indicating that these firms tend to face lower adjustment costs.Conclusion: The current study provides a direct measure on the ability of firms to adjust to target levels via security issues and repurchases in the capital markets. This in turn is a reflection of perceived riskiness and value from the investors’ point of view in an emerging market. Prior studies have focused on environmental reporting and equity risk premiums and have not evaluated the direct impact on firm value given that the trade-off theory of capital structure predicts that firm value is maximised at target i.e. optimal levels of leverage. This study addresses the current gap in the literature by evaluating the impact on firms’ value, based on the adjustment cost.

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Equity Mispricing and Leverage Adjustment Costs

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109012000051 ◽

2012 ◽

Vol 47 (3) ◽

pp. 589-616 ◽

Cited By ~ 54

Author(s):

Richard S. Warr ◽

William B. Elliott ◽

Johanna Koëter-Kant ◽

Özde Öztekin

Keyword(s):

Capital Structure ◽

Adjustment Costs ◽

Speed Of Adjustment ◽

The Cost ◽

Target Leverage

AbstractWe find that equity mispricing impacts the speed at which firms adjust to their target leverage (TL) and does so in predictable ways depending on whether the firm is over- or underlevered. For example, firms that are above their TL and should therefore issue equity (or retire debt) adjust more rapidly toward their target when their equity is overvalued. However, when a firm is undervalued but needs to reduce leverage, the speed of adjustment is much slower. Our findings support the role of equity mispricing as an important factor that alters the cost of making capital structure adjustments.

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The Micro and Macro of Managerial Beliefs

10.31235/osf.io/fctsb ◽

2020 ◽

Cited By ~ 1

Author(s):

Jose Maria Barrero

Keyword(s):

Rational Expectations ◽

Asset Price ◽

Heterogeneous Firms ◽

Adjustment Costs ◽

Consumer Welfare ◽

Sales Growth ◽

Firm Level ◽

Managerial Decisions ◽

Managerial Beliefs ◽

Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

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