Abstract
This study analyzes the heterogeneity in the speed of adjustment of leverage ratios subsequent to shocks. Using a sample of firms from the G-7 countries, we estimate capital structure adjustment speeds using a wide range of different dynamic panel methodologies. The mean estimated speed of adjustment is 20% per year, which corresponds to a shock’s half-life of about three years. We compare adjustment speeds in both market- and bank-based economies and show that firms from market-based countries rebalance faster after leverage shocks. Investigating the firm-level determinants of adjustment speed, our findings indicate that highly over-leveraged firms, firms with a higher financing deficit, and constrained firms exert adjustment with a faster speed. Finally, the macroeconomic environment has an impact on the speed of adjustment. Firms adjust more slowly during bad macroeconomic states, and the adjustment dynamics exhibit managerial market-timing behavior.
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