A note on capital structure target adjustment – Indonesian evidence

Abstract

Purpose

The purpose of this paper is to investigate whether existing capital structure target adjustment models are able to identify whether companies adjust their capital structures towards an (unobservable) target.

Design/methodology/approach

Existing capital structure target adjustment models are applied to a specific dataset by using different regression techniques (ordinary least square, fixed effect, Fama‐MacBeth, least square dummy variable “corrected”, SYS‐GMM).

Findings

Existing capital structure target adjustment models are not able to identify whether companies adjust their capital structures towards a target or not. They might indeed indicate target adjustment behaviour when companies' capital structures actually move away from their targets.

Research limitations/implications

As target adjustment behaviour is often used as support for the trade‐off and against the pecking order theory, the “horse race” between both theories seems still to be open.

Originality/value

This paper highlights some of the fallacies of existing capital structure target adjustment models and demonstrates that the results obtained by those models can be highly misleading.

Citation

Reinhard, L. and Li, S. (2010), "A note on capital structure target adjustment – Indonesian evidence", International Journal of Managerial Finance, Vol. 6 No. 3, pp. 245-259. https://doi.org/10.1108/17439131011056242