Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

Morais, Flávio; Serrasqueiro, Zélia; Ramalho, Joaquim J.S.

doi:10.1016/j.ribaf.2022.101682

Cited by 15 publications

(4 citation statements)

References 78 publications

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“…Thus, the inclusion of zero-leverage firms (e.g. firms having one year of zero debt – Morais et al , 2022) may document inconsistent findings. The distribution of the sample size is presented in Table 2.…”

Section: Data and Research Methodologymentioning

confidence: 99%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

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Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach The sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications The findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value To the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.

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Section: Data and Research Methodologymentioning

confidence: 99%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

View full text Add to dashboard Cite

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“…Trade-off theory of capital structure PAMs, Morais et al (2022) found that European firms exhibit leverage targeting behavior by adjusting toward their target at an annual rate of approximately 27.3%. They noticed that leveraged firms display a significantly higher SOA of 27.6% compared to zero-leverage firms with an annual SOA of 22.1%.…”

Section: Jel Classification -C23 G32mentioning

confidence: 99%

“…Leary and Roberts (2005) show that the nature and SOA will actually depend on the form of the adjustment costs, among other things. Lots of empirical studies have been addressed in estimating the SOA (Fama and French, 2002; Welch, 2004; Leary and Roberts, 2005; Flannery and Rangan, 2006; Kayhan and Titman, 2007; Huang and Ritter, 2009; Faulkender et al , 2012; Frank and Shen, 2019; Morais et al , 2022). In that empirical literature, there is a debate over the SOA.…”

Section: Introductionmentioning

confidence: 99%

The dynamic trade-off theory of capital structure: evidence from a panel of US industrial companies

Esghaier

2023

SEF

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Purpose This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly listed US industrial firms over the period from 2013 to 2019. It analyzes the existence of an adjustment of leverage toward its target level and whether the speed of this adjustment is influenced by the debt measure, the model specification or/and the fact that the actual debt ratio is higher or lower than its long-term target level. Design/methodology/approach This paper uses a quantitative research methodology using panel data analysis under the partial adjustment model and the error correction model using the generalized moment method in first differences and in systems to explore the dynamic nature of firms’ capital structure behavior. Findings The results show that the effects of the conventional determinants of leverage are globally consistent with the trade-off theory predictions. The dynamic versions confirm that firms exhibit leverage-targeting behavior. Although this speed of adjustment (SOA) depends on the debt and model specifications, it is around 60% on average. The estimated SOA is higher for the market leverage measure compared to the book leverage. The asymmetric adjustment model reveals that firms are more sensitive to reducing leverage than increasing it when they are away from their target; overleveraged firms exhibit approximately 5% faster adjustment than underleveraged firms when book leverage is used. Originality/value The originality of this research paper lies in its development and test of an asymmetric model to allow the leverage adjustment speed to vary depending on whether the firm’s debt ratio is above or below its target level and the methodological approach as well as the different model specifications used and the insights generated through the application of rigorous econometric techniques.

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“…Within a study entitled Product market threats and leverage adjustment, Do et al (2022) stated that the effect of product market threats on leverage adjustment is more evident for companies that have poor governance quality and are exposed to product market threats, to the extent that achieving the target capital structure finally increases the value of the company. Morais et al (2022) showed that companies with zero leverage actively adjust to the target debt ratio. Only when the analysis is restricted to financially constrained firms is there a significant difference between the two groups; otherwise, there is no difference.…”

Section: The Empirical Background Of the Researchmentioning

confidence: 99%

The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage

Rostami

Kargar

Samimifard

2022

JRFM

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The adjustment speed of financial leverage indicates the movement of companies towards the optimal capital structure, and clearly shows the financing policies of companies. The importance of optimal leverage is such that the growth and survival of companies depend on this factor. This study investigates the effect of managers’ myopia on the adjustment speed of financial leverage toward optimal leverage. The current research is applied, and from the methodological point of view, the correlation is a causal type (retrospective). The statistical population of the research includes all the companies admitted to the Tehran Stock Exchange between 2011 and 2020, and using the systematic elimination sampling method, 124 companies were selected as the research sample. The research results showed that the myopia of managers has an opposite effect on the adjustment speed of financial leverage, so in companies with myopic managers, the adjustment speed of financial leverage decreases towards optimal leverage.

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Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

Cited by 15 publications

References 78 publications

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

The dynamic trade-off theory of capital structure: evidence from a panel of US industrial companies

The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage

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