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

Abstract

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.

Foreign institutional ownership and the speed of leverage adjustment: International evidence

“…For example, Column 6 shows that the coefficient estimate of 𝐹𝐼𝑂 ̂×OL is 0.856, which is larger than the corresponding coefficient estimate using the book leverage (i.e., 0.834) reported in Column 3 of Table 5. These results are consistent with the finding in Yin and Ritter (2019) that, given the passive influence of stock price movements, existing SOA studies using market leverage are subject to substantial upward bias.…”

“…Welch (2004) shows that the variations in market leverage caused by stock price movements are long-lasting and that firms do little to counteract the influence of stock price fluctuations on financial leverage. A recent study by Yin and Ritter (2019) argues that existing SOA studies using market leverage are subject to a substantial upward bias due to the passive influence of stock price movements. They control for this bias and show that the actual market SOA is less than half of the biased market SOA.…”

Analysis of Capital Structure on Multinational Corporation: Trade off Theory and Pecking Theory Perspective

“…In addition to the two factors that have been mentioned volatility of cash flows also become the determining factor of corporate capital structure. Economic theories imply that volatility plays an important role in determining the company's capital structure, but based on empirical evidence from previous research found no significant relationship between cash flow volatility and debt ratio [5]. Furthermore, the relationship of cash flow volatility with weak capital structure, but the results of his research showed a different thing that is volatility of cash flows is an important determinant of the company's debt ratio and the use of debt with different maturity [6].…”

The impact of supply chain finance on firm capital structure adjustment: Evidence from China

“…It seems necessary to examine the relationship between SCF and firm costs in adjusting their capital structure. Firms may demonstrate asymmetric adjustment speeds in their upward and downward leverage movements in developed markets (Byoun, 2008; Yin and Ritter, 2020). Given China’s institutional context, it may also be necessary to examine the asymmetry of adjustments in the capital structure of Chinese firms.…”