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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 trade-off…

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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

Keywords

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 capital…

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. 12 no. 1
Type: Research Article
ISSN: 2043-6238

Keywords

Article
Publication date: 5 October 2015

Muhammad Naveed, Suresh Ramakrishnan, Melati Ahmad Anuar and Maryam Mirzaei

This study aims to examine the existence of capital structure dynamics and speed of adjustment during different economic periods. This study adds to the existing body of…

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Abstract

Purpose

This study aims to examine the existence of capital structure dynamics and speed of adjustment during different economic periods. This study adds to the existing body of literature by investigating the factors influencing adjustment process toward target debt in developing economies.

Design/methodology/approach

By employing two-step generalized method of moment (GMM) and sensitivity analysis, the study highlights critical factors which affect firms’ adjustment mechanism for target debt.

Findings

Dynamic GMM estimations confirm the substance of past leverage on current debt, which recognizes the existence of dynamic capital structure. The findings corroborate that adjustment process is subject to trade-off between convergence rate and cost of being off-target. The fraction of financing of Pakistani firms confirms the pattern of pecking order hypothesis. The outcome of study clearly validates the significance of dynamic trade-off modeling for optimal capital structure.

Research limitations/implications

As more data become available, the authors would extend this study to investigate the sectoral analysis to find how capital structure dynamics are different across sectors and how distinctive behavior of each sector differently affects the adjustment process toward target debt across each sector. In addition, sector-level and macro-economic factors could be incorporated to examine how external factors affect the firm’s speed of adjustment across sectors.

Practical implications

The present study provides valuable insights for banking and corporate sector, mainly in Pakistan. The companies could take into consideration the firm-level factors which affect the adjustment process toward target debt. Likewise, the borrowing and lending procedures could be advanced by complying with dynamic mechanism of speed of adjustment. Furthermore, the findings of this research provide obstinate grounds for future research.

Originality/value

Both the use of dynamic GMM adjustment model and sensitivity analysis along with Sargan test validate the health of instruments and values.

Details

Journal of Chinese Economic and Foreign Trade Studies, vol. 8 no. 3
Type: Research Article
ISSN: 1754-4408

Keywords

Article
Publication date: 5 October 2020

Isaac Cliford Queku, Seth Gyedu and Emmanuel Carsamer

The purpose of the paper is to investigate the causal relationships and speed of adjustment of stock prices to changes in macroeconomic information (MEI) in Ghana from 1996 to…

Abstract

Purpose

The purpose of the paper is to investigate the causal relationships and speed of adjustment of stock prices to changes in macroeconomic information (MEI) in Ghana from 1996 to 2018 using monthly data. The paper seeks to conduct the investigation at individual MEI level rather than the composite MEI.

Design/methodology/approach

Quantitative approach was used in this paper. Monthly data span of 1996–2018 was used. The delay and half-life technique was used to determine the speed with which the information resulting from the changes in the macroeconomic are evident in the stock price. Thereafter, Toda–Yamamoto Granger no-causality approach was used to examine the causal relationship amongst variables.

Findings

The paper revealed that although the market adjustment to MEI has improved, the speed is till slow. The exchange rate exhibited the slowest speed in respect of the market reaction while the market reaction to money supply was the fastest. Toda–Yamamoto Granger no-causality estimation also revealed a bi-directional causality between MEI (gross domestic product, interest rate and money supply) and stock price and uni-directional relationship flowing from MEI (the exchange rate and foreign direct investment) to stock price. The paper also found no causality between inflation and stock price.

Research limitations/implications

The findings although revealed improved level of market efficiency in comparison with the earlier data, the speed of adjustment is still undesirable. Rigorous approach should be adopted for the implementation of major reforms such as alternative market so as to increase the number of share listing and to increase the scope of investors' participation to enhancing trading volume and marketability and ultimately speed up information diffusion.

Practical implications

The practical implication of the low level of information processing rate of Ghana Stock Exchange (averagely more than a month) is that astute investors and market analysts could employ MEI to outperform the market prior to their infusion onto the stock market.

Originality/value

This study is one of the few studies in the Ghanaian literature that has extended the investigation of the speed of adjustment beyond composite or aggregate macroeconomic level estimation to estimation at individual variable level. This contribution is very relevant since each macroeconomic variable has unique characteristics and require specific policy framework, it is important to consider the speed of adjustment from the perspective of each of the individual variables.

Details

International Journal of Emerging Markets, vol. 17 no. 1
Type: Research Article
ISSN: 1746-8809

Keywords

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 period…

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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

Keywords

Article
Publication date: 5 September 2020

Nufazil Ahangar

The study examines the existence of target level of working capital and the speed of adjustment toward the target for eight manufacturing sectors of Indian economy. In addition…

Abstract

Purpose

The study examines the existence of target level of working capital and the speed of adjustment toward the target for eight manufacturing sectors of Indian economy. In addition, this study examines the impact of financial constraints on the speed of adjustment.

Design/methodology/approach

This study is based on secondary financial data of 1936 Indian manufacturing companies from eight sectors for a period of 18 years (2000–2018). This study employs two-step GMM techniques to arrive at results.

Findings

Results of the study confirm that firms do have target working capital, but the speed of adjustment from the current level of working capital to the target working capital is slow, and the speed of adjustment varies across sub-sectors. Moreover, we found that firms that are likely to be less constrained adjust their working capital quickly compared to firms facing high financial constraints.

Originality/value

This study contributes to working capital management literature by examining the speed with which the firms move toward their target and also the impact of financial constraints on the speed of adjustment across eight manufacturing sectors of Indian economy. Further, the study examines the impact of financial constraints on the speed of adjustment.

Details

Asia-Pacific Journal of Business Administration, vol. 12 no. 3/4
Type: Research Article
ISSN: 1757-4323

Keywords

Article
Publication date: 4 April 2008

Mats Wilhelmsson

The aim of this study is to investigate why housing prices differ between regions, and to estimate the speed‐of‐adjustment.

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Abstract

Purpose

The aim of this study is to investigate why housing prices differ between regions, and to estimate the speed‐of‐adjustment.

Design/methodology/approach

A variety of factors explains the differences in the prices of single‐family houses. Changes in disposable income over time and across regions as well as the cost of capital are important determinants. The model is based on a DiPasquale and Wheaton model where the developments of the house prices are a function of macroeconomic factors such as economic growth, changes in employment and interest rate. It is estimated on a two‐equation error correction model: first, the long‐run price equation and, second, a short‐run price model.

Findings

The estimates suggest that the speed‐of‐adjustment ranges from 16 to 78 per cent (around 50 per cent on average) depending on the region. In regions with a low population density, higher price adjustment rates are observed. Moreover, the speed‐of‐adjustment is higher in an upturn economy than in a downturn reflecting that negative housing stock adjustments is much slower than positive adjustments.

Originality/value

The main contribution is that the speed‐of‐adjustment to the long‐run equilibrium price for 21 regions is estimated instead of at a national level and, furthermore, cyclical asymmetry in responses is tested and such differences are found. It is estimated that the rate of adjustment to long‐run equilibrium price varies considerably between regions.

Details

International Journal of Housing Markets and Analysis, vol. 1 no. 1
Type: Research Article
ISSN: 1753-8270

Keywords

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 within…

2802

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

Keywords

Article
Publication date: 7 November 2023

Faisal Abbas and Shoaib Ali

This study aims to understand how quickly Japanese banks readjust their capital ratios (leverage, regulatory capital, tier-I capital and common equity) following an economic shock.

Abstract

Purpose

This study aims to understand how quickly Japanese banks readjust their capital ratios (leverage, regulatory capital, tier-I capital and common equity) following an economic shock.

Design/methodology/approach

This study uses a two-step system GMM framework to test the study's hypotheses using the annual data of Japanese commercial and cooperative banks ranging from 2005 to 2020.

Findings

The findings show that banks adjust their leverage ratio faster than regulatory capital, tier-I capital and common equity ratios. In addition to that, the results reveal that the speed of capital adjustment is higher for commercial banks than for cooperative banks, suggesting higher economic costs and implications for commercial banks. Furthermore, it is worth noting that well-capitalised (under-capitalised) banks tend to prioritise the adjustments to common equity (leverage) before considering the adjustments to leverage (common equity). According to the results, high-liquid (low-liquid) banks alter their regulatory capital and tier-I capital ratios (leverage) more quickly (more slowly) than low-liquid (high-liquid) banks.

Practical implications

The findings suggest that when formulating and implementing new banking regulations, particularly in assessing and adjusting specific capital requirements under Pillar II of Basel III, management (including bankers, regulators and policymakers) should consider the heterogeneity observed in the rate of capital adjustment across various bank characteristics. Additionally, bank managers should also consider the speed of adjustment when determining optimal half-life and target capital structures.

Originality/value

To the author's knowledge, this study represents a pioneering investigation into the rate of adjustment of capital ratios (leverage, regulatory, tier-I and common equity) within Japan's banking sector. The study employs a comprehensive dataset encompassing both commercial and cooperative banks to facilitate this analysis. A notable contribution to the existing body of literature, this study offers a detailed analysis and emphasises the varying degrees of adjustment in capital ratios. The study also highlights the heterogeneous nature of the adjustment rate in these ratios by categorising the data into well-capitalised, under-capitalised, highly liquid and low-liquid banks.

Details

Management Decision, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 3 October 2023

Muhammad Aftab, Saman Shehzadi and Fiza Qureshi

This research intends to investigate the impact of economic policy uncertainty (EPU) on the firm's leverage and its adjustment speed.

Abstract

Purpose

This research intends to investigate the impact of economic policy uncertainty (EPU) on the firm's leverage and its adjustment speed.

Design/methodology/approach

This study applies dynamic panel data modeling by using a partial adjustment model. The study is based on secondary data of the non-financial firms that are listed on the Pakistan stock exchange. For the analysis purpose, the study applies the generalized method of moments (GMM) estimation technique and uses a newly developed text-based measure of economic policy uncertainty.

Findings

The results show the negative impact of EPU on leverage decisions but a positive impact of EPU on leverage speed of adjustment for both, short-run and long-run economic policy shocks. Additional analysis reveals that the negative influence of long-run policy shocks on leverage decisions is moderated through profitability, and the negative influence of short-run policy shocks on leverage is moderated through firm size, tangibility and available growth prospects. However, the significant positive impact of EPU on the leverage speed of adjustment in both short and long-term policy shocks indicates that the speed of adjustment for these firms is not affected by policy shocks.

Originality/value

This research contributes to the existing literature on capital structure dynamics,by investigating the impact of EPU on firm financing decisions and estimating the adjustment speed of capital structure in a developing market context. The study also extends the existing literature by applying the concept of long-run and short-run economic policy uncertainty in the capital structure dynamic framework. Additionally, the new news-based measure of EPU is used. Moreover, it also looks into the COVID-19 effect on the relationship.

Details

Asia-Pacific Journal of Business Administration, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-4323

Keywords

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