Heterogeneity in capital structure adjustment revisited: Default versus non-default firms and short versus long time horizon

Abstract

This paper reexamines the issue of the heterogeneity of the speed of capital structure adjustment in firms. In contrast to previously documented contemporaneous results, we test the issue by making a distinction between default and non-default firms and employ two measures of the speed of adjustment (cumulative versus marginal). Our empirical results show that the speed of adjustment is non-uniform across firms and over time. In particular, default firms are associated with a higher speed of adjustment than non-default firms. The completion of leverage adjustment takes multiple periods. The marginal speed of adjustment accelerates from the beginning period to the end period, which is consistent with the anchoring and adjustment bias heuristic. Our empirical results are robust to using a book/market leverage, a two-/one-step estimation approach as well as the consideration of panel length, non-financial debt, zero-leverage firms, and endogeneity.