Non‐linear capital structure dynamics

We investigate the capital structure and the dynamic behaviour of firms' debt ratios in a large sample of companies from 52 countries. Our findings support a complex view of capital structure decisions, with firm, macroeconomic and institutional factors interacting in the determination of both...

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Bibliographic Details
Published in:Journal of business finance & accounting 2022-10, Vol.49 (9-10), p.1897-1928
Main Authors: Botta, Marco, Colombo, Luca Vittorio Angelo
Format: Article
Language:English
Subjects:
Adjustment
Capital structure
debt dynamics
firm financing
Leverage
pecking order theory
trade‐off theory
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Summary:We investigate the capital structure and the dynamic behaviour of firms' debt ratios in a large sample of companies from 52 countries. Our findings support a complex view of capital structure decisions, with firm, macroeconomic and institutional factors interacting in the determination of both the optimal leverage and the adjustment process towards it. This results in a complex non‐linear dynamic behaviour of firms' debt‐to‐equity ratios. These interactions contribute for almost two thirds of the explained heterogeneity of the target leverage, and around one third of the speed of adjustment towards the optimal capital structure. Overall, our results suggest that market timing and pecking order arguments prevail in the short run, while a dynamic trade‐off mechanism with costly readjustment matters mainly in the long run.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12596