Abstract
Estimating the speed of adjustment of corporate leverage in a dynamic panel model plays a prominent role in testing alternative capital structure theories, but various econometric issues of corporate finance data render the estimation severely biased. As a result, a plethora of estimation methods have been advocated to estimate the speed of adjustment but no consensus has been achieved, hence, reliable estimates of the speed of adjustment remain elusive. We propose an optimal pooling approach to reconcile starkly divergent estimates and provide a minimum variance combined consensus estimator, with negligible bias. This estimator delivers superior performance over six individual estimators and an arithmetically averaged estimator.
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