The Speed of Adjustment to the Target Market Value Leverage Is Slower Than You Think

Qie Ellie Yin*, Jay R. Ritter

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    21 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
    Early online date6 Aug 2019
    DOIs
    Publication statusPublished - 1 Sept 2020

    Scopus Subject Areas

    • Accounting
    • Finance
    • Economics and Econometrics

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