scholarly journals TRADE OFF THEORY DAN KECEPATAN PENYESUAIAN KE ARAH TARGET LEVERAGE (SUATU TINJAUAN TEORITIS DAN EMPIRIS)

2018 ◽  
Vol 9 (2) ◽  
pp. 69
Author(s):  
Dwi Cahyaningdyah
Keyword(s):  
Capital Structure ◽  
Empirical Studies ◽  
Economic Shocks ◽  
Trade Off ◽  
Speed Of Adjustment ◽  
Key Factor ◽  
Optimal Target ◽  
Spurious Result ◽  
Target Leverage ◽  
Alternative Solutions

Trade off theory of capital structure predicts that firms have optimal target leverage. However, empirical studies provide evidence that firms’ capital structure  often deviate from the target because of economic shocks. Therefore firm should make adjustment toward target leverage to maintain optimal trade off between cost and benefit of their financing decision.Understanding of adjustment behavior of the firm is key factor to comprehend firms’ capital structure dynamic. Nevertheless, asan important issue in corporate finance, speed of adjustment estimation still have several problems caused bias and spurious result. Recent studies identified several econometric problems of the model used by previous studies. This paper revisited these problems and provide several alternative solutions from recent studies. 

Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

2016 ◽  
Vol 19 (03) ◽  
pp. 1650019 ◽  
Author(s):  
Surenderrao Komera ◽  
P. J. Jijo Lukose
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Emerging Market ◽  
Adjustment Costs ◽  
Group Affiliation ◽  
Cross Sectional ◽  
Speed Of Adjustment ◽  
Business Group Affiliation ◽  
Optimal Leverage ◽  
Target Leverage

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.

Tradeoff Theory and Leverage Dynamics of High-Frequency Debt Issuers*

2020 ◽  
Author(s):  
B Espen Eckbo ◽  
Michael Kisser
Keyword(s):  
High Frequency ◽  
Low Frequency ◽  
Debt Financing ◽  
Trade Off ◽  
Speed Of Adjustment ◽  
Industrial Companies ◽  
Long Run ◽  
Speed Up ◽  
Target Leverage ◽  
Leverage Dynamics

Abstract We test whether high-frequency net-debt issuers (HFIs)—public industrial companies with relatively low issuance costs and high debt-financing benefits—manage leverage toward long-run targets. Our answer is they do not: (1) the leverage–profitability correlation is negative even in quarters with leverage rebalancing; (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers; and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic trade-off theory, the theory does not appear to hold.

The Speed of Adjustment to the Target Market Value Leverage Is Slower Than You Think

2019 ◽  
Vol 55 (6) ◽  
pp. 1946-1977 ◽  
Author(s):  
Qie Ellie Yin ◽  
Jay R. Ritter
Keyword(s):  
Capital Structure ◽  
Empirical Evidence ◽  
Stock Price ◽  
Market Value ◽  
Target Market ◽  
Price Changes ◽  
Trade Off ◽  
Price Fluctuations ◽  
Speed Of Adjustment ◽  
The Capital Structure

In the capital structure literature, speed of adjustment (SOA) estimates are similar whether book or market leverage is used. This robustness is suspect, given the survey evidence that firms target their book leverage and the empirical evidence that they don’t issue securities to offset market leverage changes caused by stock price changes. We show that existing market SOA estimates are substantially upward biased due to the passive influence of stock price fluctuations. Controlling for this bias, the SOA estimate is 16% for book leverage and 10% for market leverage, implying that the trade-off theory is less important than previously thought.

Horses and Rabbits? Trade-Off Theory and Optimal Capital Structure

2005 ◽  
Vol 40 (2) ◽  
pp. 259-281 ◽  
Author(s):  
Nengjiu Ju ◽  
Robert Parrino ◽  
Allen M. Poteshman ◽  
Michael S. Weisbach
Keyword(s):  
Capital Structure ◽  
Firm Characteristics ◽  
Trade Off ◽  
Optimal Capital Structure ◽  
Long Run ◽  
Total Capital ◽  
Realistic Representation ◽  
Optimal Target ◽  
Optimal Capital ◽  
Structure Choice

AbstractThis paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. The model uses contingent claim methods to value interest tax shields, allows for reorganization in bankruptcy, and maintains a long-run target debt to total capital ratio by refinancing maturing debt. Using this model, we calculate optimal capital structures in a realistic representation of the traditional trade-off model. In contrast to previous research, the calculated optimal capital structures do not imply that firms tend to use too little leverage in practice. We also estimate the costs borne by a firm whose capital structure deviates from its optimal target debt to total capital ratio. The costs of moderate deviations are relatively small, suggesting that a policy of adjusting leverage infrequently is likely to be reasonable for many firms.

scholarly journals Determinants of Capital Structure for Malaysian Shariah-Compliant Firms: The Impact of Revised Screening Methodology

2020 ◽  
Author(s):  
Norfhadzilahwati Rahim ◽  
Fauzias Mat Nor ◽  
Nurainna Ramli ◽  
Ainulashikin Marzuki
Keyword(s):  
Capital Structure ◽  
Financial Stability ◽  
Panel Data Analysis ◽  
Negative Relationship ◽  
Large Firms ◽  
Method Of Moment ◽  
Speed Of Adjustment ◽  
Lagged Dependent Variable ◽  
Target Leverage ◽  
The Impact

This study investigates two main objectives. Firstly, the determinants of capital structure were examined for each sector among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt (leverage 1 and leverage 2) has led to different results due to changes in the screening methodology. Secondly, this paper analyzes the target Capital Structure and Speed of Adjustment for both before and after the Revised Screening Methodology. This study employs panel data analysis by using generalized method of moment (GMM). The sample consists of 192 Shariah-compliant companies in Malaysia during the period of 1999 to 2017. The results demonstrated that the firm has target capital structure and identified specific determinants that have affected the capital structure of Shariah-compliant firms in Malaysia. Moreover, the findings have also revealed certain implications toward large firms. Large firms tend to generate more income and profit, however at the same time, these firms require more debt to support investment activities. Hence, with regards to profitability, this study identified a negative relationship between profitability and leverage for Shariah-compliant firms for all sectors. Shariah-compliant firms with high profitability will use a lower leverage in their financial activities. Thus, the results strongly support the pecking order theory. Other than that, this study found that the lagged dependent variable (lagged leverage 1 and leverage 2) presented a positive significance, and concluded that the speed of adjustment takes approximately 2 years. This suggests that the Shariah-compliant firms close approximately by 30% to 70% of the gap between current and target capital structure within one and two years. Furthermore, the findings on the target leverage level imply that after the revised screening methodology was introduced in November 2013, the speed of adjustment became faster than before the implementation of the new screening methodology. Thus, it is important for management to maintain the target leverage during financial decision making, which in turn strengthens the firm’s Shariah-compliant financial stability and sustainability, and continue to remain listed as Shariah-compliant securities. This paper provides an overview of capital structure behaviour in Malaysia.  

scholarly journals PENCAPAIAN TARGET LEVERAGE MELALUI SPEED OF ADJUSTMENT KARAKTERISTIK PERUSAHAAN

2019 ◽  
Vol 1 (2) ◽  
pp. 131-140
Author(s):  
Yasir Maulana ◽  
Ayus Ahmad Yusuf
Keyword(s):  
Real Estate ◽  
Capital Structure ◽  
Stock Exchange ◽  
Company Size ◽  
Construction Sector ◽  
Speed Of Adjustment ◽  
Growth Industry ◽  
Company Growth ◽  
Target Leverage ◽  
Dynamic Capital Structure

This paper aims to determine the effect of company characteristics on target leverage with the relation of the speed of adjustment to target leverage. The speed of adjustment is examined to complete the analysis of the concept of dynamic capital structure in Indonesia. The characteristics of the companies studied are profitability, company size, company growth, industry, tangibility, inflation and the deficit and financial surplus of companies in the property, real estate and construction sectors listed on the Indonesia Stock Exchange in 2008 to 2015. The results of this study show that property, real estate, and construction sector companies are significantly implementing leverage targets. The data also shows that there is a significant effect of speed of adjustment to the leverage target which is faster when the company has a financial surplus compared to when the financial deficit.

scholarly journals Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables

2015 ◽  
Vol 50 (5) ◽  
pp. 1105-1133 ◽  
Author(s):  
Ralf Elsas ◽  
David Florysiak
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Unobserved Heterogeneity ◽  
Speed Of Adjustment ◽  
Structure Adjustment ◽  
Dependent Variables ◽  
Target Leverage ◽  
The Impact ◽  
Biased Estimates ◽  
Structure Research

AbstractResearchers in empirical corporate finance often use bounded ratios (e.g., debt ratios) as dependent variables in their regressions. Using the example of estimating the speed of adjustment toward target leverage, we show by Monte Carlo and resampling experiments that commonly applied estimators yield severely biased estimates, as they ignore that debt ratios are fractional (i.e., bounded between 0 and 1). We propose a new unbiased estimator for adjustment speed in the presence of fractional dependent variables that also controls for unobserved heterogeneity and unbalanced panel data. This new estimator is suitable for corporate finance applications beyond capital structure research.

Does dynamic trade-off theory explain Portuguese SME capital structure decisions?

2017 ◽  
Vol 24 (3) ◽  
pp. 485-502 ◽  
Author(s):  
Filipe Sardo ◽  
Zelia Serrasqueiro
Keyword(s):  
Capital Structure ◽  
High Speed ◽  
Small Firms ◽  
Trade Off ◽  
Content Type ◽  
Speed Of Adjustment ◽  
Two Samples ◽  
Structure Adjustment ◽  
Negative Effect ◽  
Target Ratio

Purpose The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic trade-off theory, more precisely, the speed of adjustment of short-term debt (STD) and long-term debt (LTD) towards the respective target debt ratios. Design/methodology/approach Based on two samples of Portuguese firms, 1,377 small-sized firms and 811 medium-sized firms, dynamic estimators were used for the treatment of data obtained from the Amadeus database for the period 2007-2011. Findings The results indicate that small- and medium-sized firms adjust their STD and LTD ratios towards the respective target ratios. Small- and medium-sized firms present a high-speed adjustment towards the target STD ratio, suggesting that both types of firm face costs of deviating from the target capital structure, which are, probably, greater than the costs of adjustment associated with STD. However, considering the distance from the target ratio as a determinant of the adjustment speed, the results show the predominance of the negative effect of the costs of adjustment on capital structure adjustment speeds. Originality/value The results obtained for the speed of adjustment of STD and LTD, in a recession context, show that for small firms and medium-sized firms, mainly for the former, the costs of external market transactions are prohibitively high, slowing the speed of adjustment towards the target capital structure.

Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy

2019 ◽  
Vol 5 (2) ◽  
pp. 103-124
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
Capital Structure ◽  
Adverse Selection ◽  
Order Theory ◽  
Adjustment Process ◽  
Unified Framework ◽  
Pecking Order ◽  
Trade Off ◽  
Adverse Selection Costs ◽  
Adjustment Speed ◽  
Target Leverage

This paper considers the trade-off and pecking order theory in a unified framework and examines the influence of adverse selection costs on target adjustment process by investigating the relationship between firms’ financing imbalance and their target adjustment speed. Using a large dataset of 2718 non-financial and non-utility listed firms over a period of 2004–2005 to 2015–2016, the study observes that Indian firms adjust toward target leverage with a moderate adjustment speed of 32–36 percent. Moreover, firms with above-target debt make faster adjustment than firms with below-target debt, and firms with financing deficit make faster adjustment than firms with financing surplus. The extensions of target adjustment model by considering financing imbalance and direction of deviation together, and also by incorporating extent of deviation further reveal that firms try to avoid equity and prefer to deal in debt while making adjustments toward the target. In fact, firms deal in equity only when they are highly deviated from target leverage. All these findings suggest that adverse selection costs play significant role in the adjustment process. Therefore, though capital structure decisions of Indian firms are guided by trade-off theory, significance of pecking order arguments cannot be negated. This study makes important contributions to the existing literature as prior studies on impact of financing imbalance on adjustment speed are based on US which is very much different from emerging economies, particularly India.

Testing Theories of Capital Structure and Estimating the Speed of Adjustment

2009 ◽  
Vol 44 (2) ◽  
pp. 237-271 ◽  
Author(s):  
Rongbing Huang ◽  
Jay R. Ritter
Keyword(s):  
Capital Structure ◽  
Fixed Effects ◽  
Equity Capital ◽  
External Financing ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Speed Of Adjustment ◽  
Financing Decisions ◽  
The Cost ◽  
Target Leverage

AbstractThis paper examines time-series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms’ capital structures through their influence on firms’ historical financing decisions. We also introduce a new econometric technique to deal with biases in estimates of the speed of adjustment toward target leverage. We find that firms adjust toward target leverage at a moderate speed, with a half-life of 3.7 years for book leverage, even after controlling for the traditional determinants of capital structure and firm fixed effects.

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