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Heterogeneity in capital structure adjustment revisited: Default versus non-default firms and short versus long time horizon

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  • Ruwani Fernando, Jayasuriya Mahapatabendige
  • Li, Leon
  • Hou, Greg
Abstract
This paper reexamines the issue of the heterogeneity of the speed of capital structure adjustment in firms. In contrast to previously documented contemporaneous results, we test the issue by making a distinction between default and non-default firms and employ two measures of the speed of adjustment (cumulative versus marginal). Our empirical results show that the speed of adjustment is non-uniform across firms and over time. In particular, default firms are associated with a higher speed of adjustment than non-default firms. The completion of leverage adjustment takes multiple periods. The marginal speed of adjustment accelerates from the beginning period to the end period, which is consistent with the anchoring and adjustment bias heuristic. Our empirical results are robust to using a book/market leverage, a two-/one-step estimation approach as well as the consideration of panel length, non-financial debt, zero-leverage firms, and endogeneity.

Suggested Citation

  • Ruwani Fernando, Jayasuriya Mahapatabendige & Li, Leon & Hou, Greg, 2021. "Heterogeneity in capital structure adjustment revisited: Default versus non-default firms and short versus long time horizon," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 185-204.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:185-204
    DOI: 10.1016/j.iref.2021.06.001
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    More about this item

    Keywords

    Capital structure; Speed of adjustment; Default firms; Cumulative adjustment; Marginal adjustment;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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