Target Gearing in UK A Time Series Unit Root and Cointegration Methodology Approach
Year: 2004
Type: preprint
Abstract: Despite much theoretical progress, Rajan and Zingales (1995) claim that ‘very little is known about the empirical relevance of the different capital structure theories’. Indeed, the more recent developments such as Pecking Order Theory and Market Timing contradict the predictions of Trade-Off Theory. One of the aims of this paper is to test the relevance in the UK of a more general model where firms have long-run target gearing ratios but in the short run they might follow a pecking order to financing or time their equity issues when markets are buoyant. The relationship between measures of corporate capital structure is investigated using the unit root and cointegration tests. Evidence of long-run target adjustment is indeed found though, only with respect to certain ratios. Furthermore, adjustment speed coefficients imply that UK quoted firms prefer internal financing and when external funds are required debt is preferred to equity.
Source: SSRN Electronic Journal
Authors: Evarist Stoja, Jon Tucker
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2431602434