Financial Constraints and Capital Structure Dynamics Across the Business Cycle: Some Evidence from The Jse

Abstract

This paper investigates the dynamics of capital structure adjustment speeds for financially constrained, unconstrained and full sample JSE listed non-financial firms across the business cycle. Using the generalised method of moments (GMM) estimation technique, and controlling for the effects of mean reversion and extreme leverage observations, we find some evidence of moderate target adjustment behaviour for total and long term leverage in both the good and bad macroeconomic states. However adjustment speeds are higher for the short term debt ratio. Furthermore, the manner in which adjustment speeds change is highly sensitive to the definition of macroeconomic states used. We also find evidence that there is a statistically significant difference in the speed of adjustment for firms across the different macroeconomic states. However, this significance dissipates when the short term debt ratio is used. It is also documented that the difference in the speed of adjustment for the constrained and unconstrained firms is significantly different across the good and bad macroeconomic states.