The speed of adjustment to the target market value leverage is slower than you think

Qie YIN*, Jay R. Ritter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

In the capital structure literature, speed of adjustment (SOA) estimates are similar whether book or market leverage is used. This robustness is suspect, given the survey evidence that firms target their book leverage and the empirical evidence that they don't issue securities to offset market leverage changes caused by stock price changes. We show that existing market SOA estimates are substantially upward biased due to the passive influence of stock price fluctuations. Controlling for this bias, the SOA estimate is 16% for book leverage and 10% for market leverage, implying that the trade-off theory is less important than previously thought.

Original languageEnglish
Pages (from-to)1946-1977
Number of pages32
JournalJournal of Financial and Quantitative Analysis
Volume55
Issue number6
DOIs
Publication statusPublished - 1 Sep 2020

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'The speed of adjustment to the target market value leverage is slower than you think'. Together they form a unique fingerprint.

Cite this