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The Effect of Risk Management on Direct and Indirect Capital Structure Deviations

Author

Listed:
  • Xiaoyi Li

    (School of Finance, Southwestern University of Finance and Economics, 555, Liutai Avenue, Wenjiang District, Chengdu 611130, China)

  • Yung-Ming Shiu

    (Department of Risk Management and Insurance, Research Fellow, Risk and Insurance Research Center, College of Commerce, National Chengchi University, 64, Sec. 2, Zhi-Nan Road, Wen-Shan District, Taipei 11605, Taiwan)

Abstract

This study explores the effect of risk management on capital structure deviations. Specifically, we innovatively classify capital structure deviations into direct and indirect deviations, with our classification being based on deviations resulting mainly from changes in either actual or target leverage. Thus, if the variation in the actual leverage exceeds the variation in the target leverage, this deviation is considered direct. Conversely, if the target leverage varies more than the actual leverage, it is considered an indirect deviation. Our results reveal that risk management can help reduce these deviations, which mainly result from changes in actual leverage. We further demonstrate that insurers with direct deviations adjust their capital structure approximately 29.2% faster than insurers with indirect deviations.

Suggested Citation

  • Xiaoyi Li & Yung-Ming Shiu, 2024. "The Effect of Risk Management on Direct and Indirect Capital Structure Deviations," Risks, MDPI, vol. 12(12), pages 1-14, November.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:12:p:186-:d:1529051
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    References listed on IDEAS

    as
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    3. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
    4. Lian, Yujun & Wang, Jun & Huang, Manqi, 2024. "Fast or slow: Unveiling the speed of market leverage adjustment in China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    5. Hovakimian, Armen & Hovakimian, Gayane & Tehranian, Hassan, 2004. "Determinants of target capital structure: The case of dual debt and equity issues," Journal of Financial Economics, Elsevier, vol. 71(3), pages 517-540, March.
    Full references (including those not matched with items on IDEAS)

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