Title

Testing Theories of Capital Structure and Estimating the Speed of Adjustment

Department

Economics, Finance, & Quantitative Analysis

Document Type

Article

Publication Date

4-2009

Abstract

This 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 fimis" capital structures through their influence on firms' historical financing decisions. We also introduce a new econometric technique This 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. [ABSTRACT FROM AUTHOR] Copyright of Journal of Financial & Quantitative Analysis is the property of Cambridge University Press

Journal

Journal of Financial and Quantitative Analysis

Journal ISSN

0022-1090

Volume

44

Issue

2

First Page

327

Last Page

271

Digital Object Identifier (DOI)

10.1017/S0022109009090152