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How and When Do Firms Adjust Their Capital Structures toward Targets?

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  • SOKU BYOUN

Abstract

If firms adjust their capital structures toward targets, and if there are adverse selection costs associated with asymmetric information, how and when do firms adjust their capital structures? We suggest a financing needs‐induced adjustment framework to examine the dynamic process by which firms adjust their capital structures. We find that most adjustments occur when firms have above‐target (below‐target) debt with a financial surplus (deficit). These results suggest that firms move toward the target capital structure when they face a financial deficit/surplus—but not in the manner hypothesized by the traditional pecking order theory.

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  • Soku Byoun, 2008. "How and When Do Firms Adjust Their Capital Structures toward Targets?," Journal of Finance, American Finance Association, vol. 63(6), pages 3069-3096, December.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:6:p:3069-3096
    DOI: 10.1111/j.1540-6261.2008.01421.x
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