Work

Capital Structure Deviation and Speed of Adjustment

Year: 2013

Type: article

Abstract: As a firm deviates from its target leverage from above (below), the bankruptcy costs (foregone tax savings) rise at an increasing rate while the tax savings (reduced bankruptcy costs) rise at a decreasing rate, generating a stronger incentive for rebalancing capital structure. This phenomenon renders the speed of adjustment (SOA) an increasing function of the deviation. Employing a bootstrapping‐based estimation strategy that averts well‐known estimation biases, we find U.S. firms exhibit a positive SOA sensitivity to leverage deviation. Also, the SOA sensitivity is greater for overlevered than underlevered firms.

Source: Financial Review

DOI: 10.1111/fire.12017

Authors: Tarun Mukherjee, Wei Wang

Institution: LSU New Orleans

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3124873546

FWCI: 5.174

Cites: 37

Cited by: 37

Related to: 10