Capital Structure Determinants and Convergence
Year: 2011
Type: preprint
Abstract: This paper empirically examines the determinants and partial adjustment of capital structure of US and Japanese firms over the period from 1985 to 2009. Consistent with the literature, we firstly find that mostly used firm characteristics such as earnings before interests taxes, depreciation and amortization, market-to-book ratio, firm size, tangible assets, research and development expenses, credit ratings and dividend yield are the determinants of the US firms' target capital structure. However, only two firm characteristics of earnings before interests, taxes, depreciation and amortization, and firm size are the two most significant determinants for Japanese firms' target capital structure. We further find that a typical US firm would adjust towards the target capital structure within 5 years, while Japanese firms need around 6 years to converge to the target leverage ratio. The finding that US firms adjust toward the target capital structure faster than the Japanese firms is consistent with the notion that bank relationship might result in a lower financing cost and greater capital availability that ultimately lead to a slow adjustment towards the target capital structure for the Japanese firms. In general, we find supporting evidence for the tradeoff theory but not the pecking order hypothesis.
Source: SSRN Electronic Journal
Authors: Tho Nguyen, Jian Wu
Institution: Ecole Supérieure de Commerce de Rouen
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2264325216