Capital Structure Adjustment Speed Research Articles

Supplier concentration and the speed of capital structure adjustment

Using a large sample of A-share Chinese firms from 2012 to 2019, we show a positive relationship between supplier concentration and leverage adjustment speed. This positive relationship is unidirectional and primarily concentrated among over-leveraged firms rather than among under-leveraged ones. Moreover, the effect of supplier concentration is more pronounced in firms with greater bargaining power over suppliers. A plausible channel is the monitoring role imposed by suppliers, which mitigates the firm’s agency conflicts by reducing (1) information asymmetry between informed managers and uninformed market participants and (2) management opportunism and slacking. Further, we show that firms with higher supplier concentrations are more active in the security market due to having lower agency costs. Our findings demonstrate the crucial role of customer–supplier relationships in a firm’s capital structure dynamics.

Research on the Impact of Female Directors on Capital Structure Adjustment -- Based on the perspective of crash risk

This paper selects all non-financial listed companies in Shanghai and Shenzhen A shares from 2010 to 2022 as the research object, based on dynamic capital structure theory, high-level echelon theory and resource dependence theory, through panel regression , to explore the impact of female directors themselves on the speed of capital structure adjustment; And introducing crash risk into the extended model to test the relationship between female directors and the speed of capital structure adjustment from the perspective of crash risk. The results show that the existence of female directors in the board of directors will optimize the capital structure, and the increase in the proportion of female directors in the board of directors will improve the speed of capital structure adjustment; Due to the characteristics of conservative and cautious women, the existence of female directors in the board of directors will reduce the risk of stock price collapse; Based on the perspective of collapse risk, female directors still improve the speed of capital structure adjustment.

Central Bank Communication and Leverage Differentiation of Non-Financial Enterprises

ABSTRACT As an expectation management policy, central bank communication can affect corporate market expectations, thus effectively guiding corporate investment and financing behavior. Based on the quarterly data of non-financial listed enterprises from 2007 to 2020, this paper analyzes the relationship between central bank communication and non-financial corporate leverage differentiation. The results show that central bank communication can reduce corporate leverage differentiation. The increase in the degree of bank credit discrimination can further amplify the inhibitory effect of central bank loose communication on the leverage differentiation of non-financial enterprises. The mechanism analysis shows that central bank communication can affect the leverage differentiation of non-financial enterprises by reducing financial mismatches, stabilizing the market expectation mechanism, and reducing managers’ myopia. The results of the extended analysis show that the central bank’s loose communication can inhibit the degree of leverage differentiation between zombie firms and non-zombie firms, and improve the dynamic adjustment speed of corporate capital structure.

Does economic policy uncertainty matter for a firm's leverage and speed of adjustment?

PurposeThis research intends to investigate the impact of economic policy uncertainty (EPU) on the firm's leverage and its adjustment speed.Design/methodology/approachThis study applies dynamic panel data modeling by using a partial adjustment model. The study is based on secondary data of the non-financial firms that are listed on the Pakistan stock exchange. For the analysis purpose, the study applies the generalized method of moments (GMM) estimation technique and uses a newly developed text-based measure of economic policy uncertainty.FindingsThe results show the negative impact of EPU on leverage decisions but a positive impact of EPU on leverage speed of adjustment for both, short-run and long-run economic policy shocks. Additional analysis reveals that the negative influence of long-run policy shocks on leverage decisions is moderated through profitability, and the negative influence of short-run policy shocks on leverage is moderated through firm size, tangibility and available growth prospects. However, the significant positive impact of EPU on the leverage speed of adjustment in both short and long-term policy shocks indicates that the speed of adjustment for these firms is not affected by policy shocks.Originality/valueThis research contributes to the existing literature on capital structure dynamics,by investigating the impact of EPU on firm financing decisions and estimating the adjustment speed of capital structure in a developing market context. The study also extends the existing literature by applying the concept of long-run and short-run economic policy uncertainty in the capital structure dynamic framework. Additionally, the new news-based measure of EPU is used. Moreover, it also looks into the COVID-19 effect on the relationship.

Business environment and corporate financing decisions: From the perspective of dynamic adjustment of capital structure

This paper studied the impact of business environment on enterprise from the view of capital structure dynamic adjustment using the system-GMM. The results showed that a great business environment accelerates the adjusting speed of companies’ capital structure. And the optimization of business environment could relief the financing constraint and reduce the cost of company. Additionally the business environment optimization effect on the speed of capital structure adjustment of non-state-owned enterprises, non-bank-related enterprises, and enterprises with high industry competition. These results show that continuous optimization of the business environment will provide a more “market-oriented and fair” financing environment for Chinese enterprises.

Group Finance Companies and Dynamic Adjustment of Capital Structure of Related Listed Companies

ABSTRACT Using the data of all A-share listed companies from 2009 to 2018, we find that the group finance companies inhibit the dynamic adjustment speed of capital structure to their optimal level of the related listed companies. The reason is that the controlling shareholders may occupy the related deposits of listed companies in the finance companies. We find that the inhibition effect is more significant when the controlling shareholders’ shareholding ratio is low and the related party transactions are high, and is weakened after the implementation of the deleveraging policy. Moreover, the inhibition effect is significant in both the upward and downward adjustment processes. In addition, the finance companies make the deviation of capital structure of listed companies larger, and this effect is mainly reflected in upward deviation. We also find that the functions of finance companies will affect the dynamic adjustment of capital structure of listed companies.

Family ownership and speed of adjustment towards targeted capital structures: A study of ASEAN firms

AbstractUtilising a sample of ASEAN firms, we examine the effects of family ownership on firms' speed of adjustment to targeted capital structure. We find that family firms adjust their capital structure more slowly than non‐family firms. This is due to the higher costs of adjustment associated with high information asymmetry and agency conflicts between family owners and external investors. The effect of family ownership on capital structure adjustment speed is more pronounced when family firms have a higher level of family board involvement and higher ownership concentration. There is also an asymmetric effect of family ownership on capital structure adjustment speed at different levels of debt, by the distance from the targeted capital structure, and between overleveraged and underleveraged firms. Overall, evidence in our study suggests that family ownership is a key determinant on how quickly ASEAN firms may adjust their capital structure towards targeted levels.

Effects of Digital Transformation on Dynamic Capital Structure Adjustment: Evidence from China

Over the past two decades, there has been a surge in digital innovation. China is the world’s second-largest digital economy entity and the national strategy to build a digital China is in full swing. Chinese enterprises have received great support while pursuing digital transformation. This study aims to explore the impact of digital transformation on firm dynamic capital structure adjustment by taking evidence from Chinese listed firms. Based on the data of 3855 Chinese A-share listed firm-year observations during 2011–2021, this study employed a panel data fixed effects model to ascertain the association between the proposed variables. The results indicate that digital transformation has a significant positive effect on accelerating capital structure adjustment speed. Furthermore, we show that digital transformation promotes dynamic capital structure adjustment through financial flexibility. The impact of digital transformation on dynamic capital structure adjustment is characterized by heterogeneity in the ownership type, asset size, and credit cycle. In addition, reduced financing constraints and growing economic policy uncertainty will moderate the relationship between digital transformation and dynamic capital structure adjustment. Our findings provide insights into how digital transformation is driving companies to accelerate their capital structure adjustment speed to the optimal, and supplements the existing literature on the determinants of dynamic capital structure adjustment.

The Speed of Adjustment Capital Structure in The Perspective of Structure-Conduct-Performance Theory

Main Purpose - The research objective is to explain the factors that determine the speed of capital structure adjustment based on market concentrations on profitability, company growth, liquidity, exchange rates and inflation.Method - The research method used is the explanatory method with a causality approach. The unit of analysis for this research is non-financial sector issuers listed on the Indonesia Stock Exchange in 2009-2015.Main Findings - This research finds that the structure-conduct-performance theory can be used as a theory that explains the speed of capital structure adjustment. In addition, the results of the study also found the exchange rate to be a driving factor in increasing the speed of capital structure adjustment.Theory and Practical Implications - Research findings provide support for the structure-conduct-performance theory which indicates that market concentration is a determining factor in company behavior in adjusting capital structure.Novelty - This study uses the theory of performance-behavior structure in explaining the variables that determine the speed of capital structure adjustment.

Local corruption and capital structure

This paper examines how local corruption affects capital structure. With a sample of 6,156 observations from 601 firms listed in Vietnam, we find that local corruption is positively and negatively related to capital structure and capital structure adjustment speed respectively. In addition, our findings show that state ownership reduces the positive effect of local corruption on debt ratio.

Does digital transformation speed up dynamic capital structure adjustment? Evidence from China

This paper examines whether and how digital transformation impacts capital structure adjustment speed. We find that digital transformation speeds up capital structure adjustment. Furthermore, digital transformation can improve the probability of leverage upward (downward) adjustment by issuing debts and dividends (issuing equities and repaying debts). Channel tests show that reducing information asymmetry, mitigating agency problems, and alleviating financial constraints are possible mechanisms. Cross-sectional tests show that the findings are more pronounced for firms in highly competitive industries, located in provinces with high level of market development, and in years of high economic policy uncertainty.

Adjustment speed of capital structure: A literature survey of empirical research

We synthesize empirical studies on the determinants of the heterogeneity in the adjustment speed (speed of adjustment; SOA) of capital structure. These determinants are categorized into six groups, namely, (1) firm-specific characteristics, (2) financial reporting and managerial incentives, (3) corporate governance, (4) informal institutions, (5) financial market attributes and (6) economy-wide attributes. From this analysis, we perceive important potential research questions linked to identifying channels associated with the costs and frictions explaining SOA heterogeneity, including financial reporting quality aspects, firm internal and external monitoring mechanisms and institutional and cultural elements. Interesting avenues for future research also include considering SOA dynamics for comparable cross-country samples and the investigation of the subsequent consequences of capital structure adjustments. JEL Classification: G30, G32, G34, M41

Moderating Role of COVID-19 Crisis on Firm Leverage Speed of Adjustments: Evidence from Pakistan

This study evaluates the impact of firm-specific, industry-specific, and macroeconomic determinants on the speed of capital structure adjustment and to see if COVID-19 impacted these relationships. Using quarterly data of all listed non-financial firms in Pakistan for the period 2016-2021, a dynamic panel data model using the generalized method of moment (GMM) was used for estimation. It was found that firm size, growth potential, non-debt tax shield, and GDP growth positively impact firm leverage, while profitability and tangibility negatively impact leverage. The study found evidence of convergence to target leverage by Pakistani firms. These firms' capital structure adjustment speed was estimated as 16.7% per quarter. Moreover, COVID-19 was not found to affect the adjustment speed of firms, directly. Furthermore, greater distance from target leverage, growth potential, and GDP growth rate resulted in a lower speed of adjustment, whereas higher profitability and liquidity were found to increase the speed of adjustment.

Capital Structure Adjustment Speed and Ownership Structure: A Research on BIST 100 Index Food Sector Firms

In this study, the capital structure adjustment speed of 19 food sector firms in the Borsa Istanbul (BIST) 100 index has been estimated between 2010 and 2021. The effect of ownership identity on the capital structure adjustment speed has been investigated within the scope of family and non-family firms. The seven firms have been classified as non-family firms (NFF) and twelve as family firms (FF). The capital structure adjustment speed for family and non-family firms has been composed of the classical dynamic partial adjustment model. The Generalized Moments Method (GMM) model has been used as the econometric model in estimating the models. The results obtained from the study revealed that there is no significant difference between the debt ratios of family companies and non-family firms. The adjustment speed of family firms has been determined as 68%, and the adjustment speed of non-family firms has been approximately 56%. The capital structure adjustment speed of family firms is higher than non-family firms. The results show that family firms are less exposed to financial constraints than other firms increasing their borrowing capability, thus enabling them to reach the target debt level faster. The findings suggest that ownership structure plays a vital role in capital adjustment behavior.

Governance of non-state-owned shareholders and corporate capital structure decision: A mechanism test from the opportunistic behavior of management.

It is an important measure in the reform of state-owned enterprises to improve the efficiency of capital operation by introducing non-state-owned shareholders. This paper explores the impact of non-state shareholder governance on capital structure decision-making by using the data of 2008-2021 A-share state-owned listed companies from the perspective of the speed and deviation of capital structure adjustment. The results reveal that only non-state shareholding has no significant impact on the capital structure adjustment of a company. However, the appointment of senior management by non-state shareholders can speed up the capital structure adjustment and lower the degree of capital structure deviation. Moreover, when the capital structure goes down, the appointment of non-state-owned shareholders plays a larger role in accelerating the capital structure adjustment, which makes the deviation from the actual capital structure and the target capital structure smaller. Further research shows that the above relationship between non-state shareholder governance and the optimization and adjustment of the capital structure only exists in local SOEs and competitive SOEs. In addition, the path test found that non-state shareholder governance affects the dynamic adjustment of capital structure by reducing opportunism behavior of management rather than by financing constraints.

Speed of Adjustment of Capital Structure (Empirical Study on the Aviation Industry in Indonesia and Malaysia)

The purpose of this study is to prove how much SOA capital structure, what factors affect the optimal leverage and what factors affect the SOA capital structure in the airline industry in Indonesia and Malaysia. Hypothesis testing in this study was conducted using panel data regression. The sample used is 10 aviation industry companies in Indonesia and Malaysia with 100 observations from 2010-2019. The regression model is determined based on the results of the Chow and Hausman tests. Empirical findings from 100 observations of panel data variables of company size, short-term debt and non-debt tax shield have a positive and significant effect on optimal leverage. Profitability, asset growth, and business risk variables have a negative and significant effect on optimal leverage. Partial adjustment model (PAM) to measure the speed of firm adjustment to optimal leverage. From the partial adjustment model estimation results, the significant leverage lag indicates that airline industry companies in Indonesia and Malaysia adjust their capital structure towards optimal leverage with SOA of 46.20% per year. Generalized methods of moments (GMM) to estimate the speed of capital structure adjustment. The results show that macroeconomic variables, namely GPD growth, have a negative and significant influence on the speed of capital structure adjustment. In conclusion, it is evident that the funding behavior in the airline industry in Indonesia and Malaysia tends to follow the dynamic trade off theory.

Employment protection and leverage adjustment speed: Evidence from China

Stricter employment protection may affect capital structure adjustment speed in two ways. First, it may increase the cost of capital and decrease the leverage adjustment speed. Second, it increases financing needs and capital adjustment speed. Using China's 2008 Labor Contract Law as a natural experiment and the PSM-DID methodology, we find that the latter effect dominates the former. Specifically, stricter employment protection increases leverage adjustment speed, and this effect is more pronounced for non-state-owned firms and firms with larger leverage deviations. Furthermore, transmission channel tests show that employment protection increases firms’ substitution of labor with capital, driving up investment and financing needs. Finally, the increased leverage adjustment speed induced by enhanced employment protection is beneficial to firm performance.

Corporate Governance Quality and Capital Structure Dynamics: Evidence from Pakistan

Corporate governance is highlighted as an important aspect of developing economies. The literature well explained the relationship between corporate governance and capital structure, but little is known about the role of debt as a takeover defense and disciplinary tool, particularly for a debt-based economy such as Pakistan. This study used data from 173 non-financial firms listed on a stock exchange in Pakistan from 2008 to 2017. For the empirical investigation, the study incorporated the Orthogonal Generalized Method of Momentum approach to unbalanced panel data owing to endogeneity. The findings show that in over-levered firms, the adjustment speed of capital structure is slower with weak corporate governance. This result indicates that managers use debt as a takeover defense tool to protect their jobs, even at the cost of shareholders’ benefits. However, for under-levered firms, the adjustment speed of capital structure with weak governance is slower. This aspect specifies that the disciplinary effect of debt is more important for managers. This study concludes that managers with weak corporate governance take benefits at the cost of shareholders’ wealth. The study recommends that managers should develop an understanding of corporate governance to safeguard the rights of the shareholders.

Capital Structure Adjustment Speed in Indonesia: Does Sharia Compliance Matter?

Leverage Speed of Adjustment (henceforth SOA) has previously been studied by researchers; however, the examination of its connection with sharia law has been overlooked. The majority of the literature currently in circulation comes from the Middle East and North Africa (MENA) region and Malaysian markets, so its implications for businesses in Indonesia may not be applicable given local regulations and cultural norms. This study investigates the distinction in the debt levels and the SOA of firms in Indonesia based on compliance to sharia law. The Two-step Generalized Method of Moment (GMM) model was used to calculate the SOA in the leverage model. We discover that sharia compliance plays a role in stimulating the Indonesian firm’s level of debt and leverage SOA. To put it more precisely, sharia firms use less debt and have a slower SOA than conventional firms. Overall, Indonesian firms implement the dynamic trade-off theory in their leverage framework. Instead of relying on conventional debt, which is only available at certain levels, sharia firms must issue Islamic debt instruments to accelerate the speed of adjustment. Even after a robustness test using various sharia compliance approaches, our results remained consistent.

Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization

Do firms change their capital structure adjustment speed towards a target when adjustment costs change? Under a unified capital structure approach that combines the static trade-off and pecking order theories, firms minimize adjustment costs in setting their target adjustment speed. For below-target firms, the availability of share repurchases lowers the expected cost of increasing leverage towards the target. Extending the adjustment cost-based unified framework to the availability of share repurchases, which exogenously lowers the expected cost of leverage increases for below-target firms, I show the availability of share repurchases to result in these firms increasing their leverage adjustment speed towards a target. As predicted, this effect does not hold for the above-target firms.