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Speed of adjustment towards target leverage: evidence from a quantile regression analysis

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  • Thao Nguyen
  • Min Bai
  • Greg Hou
  • Cameron Truong

Abstract

Through employing a quantile regression approach and a dataset of 206,046 firm‐year observations over the period 1970–2017 in the United States market, we examine the heterogeneity and asymmetry in the speed of adjustment (SOA) towards target leverage. We document that high‐ and low‐levered firms adjust more quickly towards their target levels than do mid‐levered firms. This holds true when total leverage and long‐term leverage are considered in the analysis. Second, there is a difference in SOA between low‐ and high‐levered firms, which points to SOA skewness. Third, when short‐term leverage is considered in the analysis, the adjustment speed becomes smaller at varying levels of short‐term debts. Finally, empirical evidence from total leverage and long‐term leverage adjustments is consistent with the trade‐off theory, whereas empirical evidence from short‐term debt adjustments supports the pecking order theory.

Suggested Citation

  • Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2021. "Speed of adjustment towards target leverage: evidence from a quantile regression analysis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5073-5109, December.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:4:p:5073-5109
    DOI: 10.1111/acfi.12750
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    2. Ha Thanh Nguyen & Balachandran Muniandy & Darren Henry, 2024. "Adjustment speed of capital structure: A literature survey of empirical research," Australian Journal of Management, Australian School of Business, vol. 49(3), pages 448-477, August.
    3. Daisuke Tsuruta, 2023. "Do small businesses adjust their capital structure? Evidence from the global financial crisis in Japan," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 843-871, April.

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