Determinants of the adjustment speed of capital structure

Abstract

Purpose – The purpose of this paper is to examine the role of institutional, macroeconomic, industry, and firm characteristics on the adjustment speed of corporate capital structure within the context of developing countries. Design/methodology/approach – The authors considers a sample of 986 firms drawn from nine developing countries in Africa over a period of ten years (1999-2008). The study develops dynamic partial adjustment models that link capital structure adjustment speed and institutional, macroeconomic, and firm characteristics. The analysis is carried out using system Generalized Method of Moments procedure which is robust to data heterogeneity and endogeneity problems. Findings – The paper finds that firms in developing countries do temporarily deviate from (and partially adjust to) their target capital structures. Our results also indicate that: more profitable firms tend to rapidly adjust their capital structures than less profitable firms; the effects of firm size, growth opportunities, and the gap between observed and target leverage ratios on adjustment speed are functions of how one measures capital structure; and adjustment speed tends to be faster for firms in industries that have relatively higher risk and countries with common law tradition, less developed stock markets, lower income, and weaker creditor rights protection. Research limitations/implications – Future research should focus on examination of the adjustment speed of debt maturity structure. Identification of industry-specific characteristics that affect the pace with which firms adjust their capital structure to the optimum is another possible avenue for future research. Practical implications – Our findings have practical implications for corporate managers, governments, legislators, and policymakers. Originality/value – The study focuses on firms in developing countries for which the literature on adjustment speed of capital structure is virtually non-existent. Furthermore, unlike previous works on capital structure, it explicitly models industry variable as one of the determinants of adjustment speed. Therefore, it contributes to the literature on capital structure and adjustment speed in general and to the literature on developing countries in particular.

Do Indonesian firms practice target capital structure? A dynamic approach

“…Nevertheless, the body of knowledge has been documenting studies on target capital structure with developed economies monopolizing the attention of researchers over the years (Ramjee and Gwatidzo, 2012) leaving the emerging markets far behind (Lemma and Negash, 2014).…”

Manfaat Laba Untuk Menambah Utang Dan Mengurangi Pajak

“…Korporasi ritel berusaha untuk dapat membayar utang dan bunga kepada para kreditur dari laba korporasi dan berusaha untuk menekan terjadinya gagal bayar. Korporasi ritel yang meminimalkan aset tetap sebagai jaminan atas utang akan terus terpacu untuk memperbaiki dan meningkatkan kinerja korporasi agar terjadi peningkatan perolehan laba korporasi yang digunakan untuk membayar utang dan bunga (Lemma & Negash, 2014;Zhengwei, 2013). Namun, di sisi lain rendahnya aset tetap yang dijaminkan korporasi atas utang kepada kreditur memunculkan sikap keengganan dan ketakutan pada kreditur untuk meminjamkan dananya kepada korporasi.…”

Capital Structure Management by Share Repurchase for Companies in Emerging Markets

“…On the one hand, in accordance with the compromise theory the farther the company position is from the target capital structure, the bigger the alternative costs of deviation from it, and consequently, the speed of adjustment should be higher [Aybar-Arias et al, 2012]. On the other hand, if deviation from the target value of the financial leverage is significant and costs of adjustment are too high the company may elect not to correct the capital structure [Lemma, Negash, 2014]. The results of the majority of empirical papers [Bonaime, 2012; Andriosopoulos, Hoque, 2013] found out that in case of correcting the capital structure by means of share repurchase, the companies with the capital structure below the target value (the debt load is below the target value) have the highest speed of adjustment to the target capital structure.…”