Capital structure adjustments: Do macroeconomic and business risks matter?

Abstract

We show that risk plays an important role in estimating the adjustment of the firm's capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm's current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our investigation suggests that models without risk factors yield biased results.

The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies

“…The result led the authors to assert that financial environment plays an important role in companies' capital structure decisions and on their subsequent consequences. Baum et al (2017) asserted that the leverage evolution follows a "mean reverting" process, but the speed to adapt at this process depends on company-specific factors (difficulty of financing, firm evaluation on the capital market, company size, profitability, and leverage), on the countries' macroeconomic conditions, and last but not least, on certain omitted factors which may have a significant impact. In terms of macroeconomic conditions, like Cook and Tang (2010); Drobetz and Wanzenried (2006); de Haas and Peeters (2006); Baum et al (2017) also noticed the importance of the real GDP growth.…”

Dynamic Corporate Capital Structure Behavior: Empirical Assessment in the Light of Heterogeneity and Non Stationarity

“…In Warr et al (2012) over-levered firms adjust rapidly when equity is overvalued, while undervalued firms adjust at a much slower pace. Baum et al (2014) provide evidence that risk exerts asymmetric effects on SOAs, even after controlling for financial unbalances in driving actual/target leverage deviations. 42 There are cases in which conclusions disagree: for example, Aybar-Arias et al (2012) find that firms adjust faster when the actual debt is closer to the target because of lower adjustment costs, while in Drobetz and Wanzenried (2006) firms further away from optimal capital structure adjust more readily.…”

“…14 This strand of literature counts a long and non exhaustive list: Fisher et al (1989), Gilson (1997), Roberts (2002), de Haas andPeeters (2006), Drobetz and Wanzenried (2006), Byoun (2008), Cook and Tang (2010), DeAngelo et al (2011), Florysiak (2011), Aybar-Arias et al (2012), Dang et al (2012), Faulkender et al (2012, Halling et al (2012), Korteweg and Strebulaev (2012), Warr et al (2012), Baum et al (2014). Recently, Pereira-Alves and Ferreira (2011), and Oztekin and Flannery (2012) use dummy interactions to extend the international comparison (in the linear model context) of Antoniou et al (2008) to explore the effect of country-specific institutional determinants.…”

Information Asymmetry and Leverage Adjustments: A Semiparametric Varying-coefficient Approach

“…There are several theoretical papers exploring the effect of information asymmetry on capital structure. However, because of the limitations of data, the empirical assessments are rarely conducted at the firm level, but more commonly assessed at the country level where the institutional environment (such as the accounting standard) or macroeconomic risk is used as an indirect measure of information asymmetry (Öztekin and Flannery, 2012;Baum et al, 2017). To the best of our knowledge, we are the first to use the firm level information asymmetry measure as a determinant of adjustment speed.…”