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Article
Publication date: 5 October 2020

Zélia Serrasqueiro, Fernanda Matias and Julio Diéguez-Soto

This paper seeks to analyze the family firm's capital structure decisions, focusing on the speed of adjustment (SOA) as well as on the effect of distance from the target…

Abstract

Purpose

This paper seeks to analyze the family firm's capital structure decisions, focusing on the speed of adjustment (SOA) as well as on the effect of distance from the target capital structure on the SOA towards target short-term and long-term debt ratios in unlisted small and medium-sized family firms.

Design/methodology/approach

Methodologically, we use dynamic panel data estimators to estimate the effects of distance on the speeds of adjustment towards those targets. Data for the period 2006–2014 were collected for two research sub-samples: one sub-sample with 398 family firms; the other sub-sample contains 217 non-family firms.

Findings

The results show that the deviation from the target debt ratios impacts negatively on the speeds of adjustment towards target short-term and long-term debt ratios in unlisted family firms. These results suggest that family firms, deviating from target debt ratios, face deviation costs, i.e. insolvency costs, inferior to the adjustment costs, i.e. transaction costs. Therefore, family firms stay away from the target debt ratios for a long time than do non-family firms.

Research limitations/implications

The research sample comprises a low number of family firms, therefore for future research we suggest increasing the size of the sample of family firms to get a deeper understanding of family firms' SOA towards capital structure. Additionally, we suggest the analysis of other potential determinants of the speed of adjustment towards target capital structure.

Practical implications

The results obtained suggest that the distance from the target short-term and long-term debt ratios can be avoided if these firms do not depend almost exclusively on internal finance to adjust towards target capital structure. Moreover, for policymakers, we suggest the creation/promotion of alternative external finance sources, allowing reduced transaction costs that contribute to a faster adjustment of small family firms towards target capital structure.

Originality/value

The most previous research focusing on capital structure decisions have focused on listed family firms. To fill this gap, this study examines the speed of adjustment towards target debt ratios in the context of unlisted family firms. Moreover, transaction costs are a function of debt maturity, therefore this study examines separately the speeds of adjustment towards target short-term and long-term debt ratios. This paper shows that the adjustment costs (i.e. transaction costs) could hold back family firms from rebalancing its capital structure.

Details

Journal of Family Business Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2043-6238

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Abstract

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Functional Structure Inference
Type: Book
ISBN: 978-0-44453-061-5

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Abstract

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Review of Marketing Research
Type: Book
ISBN: 978-0-85724-728-5

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Article
Publication date: 16 June 2017

Filipe Sardo and Zelia Serrasqueiro

The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic…

Abstract

Purpose

The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic trade-off theory, more precisely, the speed of adjustment of short-term debt (STD) and long-term debt (LTD) towards the respective target debt ratios.

Design/methodology/approach

Based on two samples of Portuguese firms, 1,377 small-sized firms and 811 medium-sized firms, dynamic estimators were used for the treatment of data obtained from the Amadeus database for the period 2007-2011.

Findings

The results indicate that small- and medium-sized firms adjust their STD and LTD ratios towards the respective target ratios. Small- and medium-sized firms present a high-speed adjustment towards the target STD ratio, suggesting that both types of firm face costs of deviating from the target capital structure, which are, probably, greater than the costs of adjustment associated with STD. However, considering the distance from the target ratio as a determinant of the adjustment speed, the results show the predominance of the negative effect of the costs of adjustment on capital structure adjustment speeds.

Originality/value

The results obtained for the speed of adjustment of STD and LTD, in a recession context, show that for small firms and medium-sized firms, mainly for the former, the costs of external market transactions are prohibitively high, slowing the speed of adjustment towards the target capital structure.

Details

Journal of Small Business and Enterprise Development, vol. 24 no. 3
Type: Research Article
ISSN: 1462-6004

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Article
Publication date: 1 October 2004

Stuart Glosser and Lonnie Golden

Has the character of adjustment of labor input in the US manufacturing sector been changing over the last few decades? This question is addressed with time‐series…

Abstract

Has the character of adjustment of labor input in the US manufacturing sector been changing over the last few decades? This question is addressed with time‐series estimation using data through 2001. Impulse responses of employment and average weekly hours to a given shock in output demand are generated from multi‐equation vector autoregressions. The results reveal a marked change in the character of labor input adjustment as compared with the two decades prior to 1979, with some heterogeneity among 18 detailed industries. Adjustment of hours has risen somewhat while adjustment of employment has dropped considerably. This intensifying adjustment of hours vis‐à‐vis employment is consistent with hypotheses regarding employers' potential reactions to a skill‐upgrading of jobs under greater market pressures to restrain cost. US manufacturing employers appear to be increasingly adopting strategies of “lean staffing,” while “hoarding” and shedding work hours, in response to cyclical fluctuation in demand. This phenomenon may be a structural change contributing to a recent “jobless recovery” in the US.

Details

International Journal of Manpower, vol. 25 no. 7
Type: Research Article
ISSN: 0143-7720

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Article
Publication date: 6 May 2014

Tesfaye T. Lemma and Minga Negash

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…

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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.

Details

Journal of Applied Accounting Research, vol. 15 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 26 October 2010

Sulagna Mukherjee and Jitendra Mahakud

The purpose of this paper is to study the dynamics of capital structure in the context of Indian manufacturing companies in a partial‐adjustment framework during the…

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1309

Abstract

Purpose

The purpose of this paper is to study the dynamics of capital structure in the context of Indian manufacturing companies in a partial‐adjustment framework during the period 1993‐1994 to 2007‐2008.

Design/methodology/approach

This paper specifies a partial‐adjustment model and uses the generalized method of moments technique to determine the variables which affect the target capital structure and to find out the factors affecting the adjustment speed to target capital structure.

Findings

Firm‐specific variables like size, tangibility, profitability and market‐to‐book ratio were found to be the most important variables which determine the target capital structure across the book and market leverage and the factors like size of the company, growth opportunity and the distance between the target and observed leverage determine the speed of adjustment to target leverage for the Indian manufacturing companies.

Research limitations/implications

The behavioural variables like managers' confidence and attitude towards raising the external finance have not been incorporated in the model to determine the target capital structure due to the data constraint.

Practical implications

This paper has implications for corporate managers in India, for example, to consider the various adjustment costs while altering the financing decisions of the company with other variables like flexibility of the manager, direct cost of debt and equity.

Originality/value

This paper is first of its kind to study both the determination of target capital structure and the speed of adjustment to target capital structure in the context of Indian companies.

Details

Journal of Advances in Management Research, vol. 7 no. 2
Type: Research Article
ISSN: 0972-7981

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Book part
Publication date: 12 November 2015

Lori L. Taylor

Differences in the cost of living and the general attractiveness of communities lead to significant, regional differences in the prices school districts must pay for their…

Abstract

Differences in the cost of living and the general attractiveness of communities lead to significant, regional differences in the prices school districts must pay for their most important resource – people. According to the most recent data from the National Center for Education Statistics, labor costs differ by more than 50% from the lowest-cost district to the highest-cost district within California, Florida, New York, Texas, and West Virginia. Furthermore, all states but Hawaii and Rhode Island face at least a 7.7% internal differential in labor cost. Most states fail to account for such cost differences in their school finance formulas, leading to inequitable differences in school district purchasing power. This chapter compares and contrasts the various strategies states use to make geographic cost adjustments to their school funding formula, describes the implications of geographic adjustment for interstate and intrastate measures of school finance equity (and corresponding litigation), and discusses the impact that such adjustments could have on the distribution of federal aid for economically disadvantaged students under Title 1 of the Elementary and Secondary Education Act.

Details

Legal Frontiers in Education: Complex Law Issues for Leaders, Policymakers and Policy Implementers
Type: Book
ISBN: 978-1-78560-577-2

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Article
Publication date: 5 June 2017

Islam Abdeljawad and Fauzias Mat Nor

The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital…

Abstract

Purpose

The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision.

Design/methodology/approach

This study used the GMM system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment (SOA) of capital structure.

Findings

This study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7 percent annually and this rate increased to 14.2 percent when the timing variable is accounted for. Moreover, the SOA is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market.

Research limitations/implications

The findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research.

Originality/value

This study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation support the conclusion that firms consider both targeting and timing in their financing decisions. This study provides evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. Therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm.

Details

International Journal of Managerial Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 3 August 2015

Yan Yang, Fengli Wang and Shou Chen

The paper aims to address how firms make strategic adjustment to the changing resource availability in different monetary policy conditions and how the stickiness of cost

Abstract

Purpose

The paper aims to address how firms make strategic adjustment to the changing resource availability in different monetary policy conditions and how the stickiness of cost influences the strategic adjustment, and to dig out the major internal and industrial factors that influence the relationship between strategic change and monetary policy conditions.

Design/methodology/approach

The mechanism of how monetary policy affects strategic change is expounded by resource-based view and transaction cost theory. The balanced panel data of 422 companies of manufacturing industry listed in Chinese A share market before the end of 2003 from 2004-2013 are selected as sample to test the theoretic hypotheses.

Findings

It was found that looser monetary policy results in greater strategic change than the tighter one for the high adjustment cost. External capital dependence and industrial competition intensity strengthen the positive correlation between monetary policy condition and strategic change. Private firms are more susceptible to money supply condition change compared with state-owned enterprises. Companies tend to expand investment on fixed asset but to shrink investment on R & D and trademark in looser money supply condition.

Practical implications

Companies make bigger strategic adjustment in looser monetary policy condition for the greater availability of financial resources and lower market risk, but smaller adjustment in the tight one. However, owing to the sunk cost and the high adjustment cost, companies are not suggested to make aggressive strategic adjustment in the loose monetary conditions so as to avoid overcapacity and financial risk in tight monetary policy condition. For the policy-maker, as loose monetary policy cannot stimulate innovation but boost expansion on capacity, it is better to strengthen the resources configuration mechanism of monetary policy when making monetary policy.

Originality/value

This paper fulfils a theoretic gap to study the mechanism of how monetary policy influence corporate strategic resource reconfiguration via affecting the resource base of a company by combining resource-based view and transaction cost theory.

Details

Chinese Management Studies, vol. 9 no. 3
Type: Research Article
ISSN: 1750-614X

Keywords

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