Abstract
In the capital structure literature, estimates of the speed of adjustment (SOA) to target leverage are roughly similar whether book value debt ratios or market value debt ratios are used. This robustness is suspect, given the survey evidence that firms target their book debt ratios and the empirical evidence that they don't issue securities to offset changes in the market value debt ratio caused by stock price changes. I show that existing estimates of the speed of adjustment for market value debt ratios are substantially upward biased due to the passive influence of large stock price fluctuations. After controlling for this bias, I estimate a SOA of 16% for book leverage and 10% for market leverage.
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