Partial Adjustment Model Research Articles

Há Influência da Tangibilidade na Velocidade de Ajuste da Estrutura de Capital?

This study investigates the influence of the degree of tangibility on the velocity of adjustment towards the target debt, based on dynamic trade off theory. In view of the lack of consensus among researchers, with previous studies showing a diverse range of findings, the topic is a relevant one. We apply the partial adjustment model with Arellano-Bond and Blundell-Bond estimators to dynamic panel data in order to determine the rate of adjustment of the indebtedness of non-financial companies of the United Kingdom in the 10-year period from 2005 through 2014. Three samples are used. The first is composed of 1,045 companies, the second of the 309 companies with the highest degree of tangibility, and the third of the 309 companies with the lowest degree of tangibility. The empirical results present statistically significant evidence of the influence of the degree of tangibility on the speed of adjustment of the level of indebtedness. The speed of adjustment for the group of companies with greater tangibility is less than that of the group of companies with lesser tangibility, when the Blundell-Bond model - whose estimators are more efficient and less biased - is used. These results can contribute to the better management by companies of their capital structure.

Há Influência da Tangibilidade na Velocidade de Ajuste da Estrutura de Capital

This study investigates the influence of the degree of tangibility on the velocity of adjustment towards the target debt, based on dynamic trade off theory. In view of the lack of consensus among researchers, with previous studies showing a diverse range of findings, the topic is a relevant one. We apply the partial adjustment model with Arellano-Bond and Blundell-Bond estimators to dynamic panel data in order to determine the rate of adjustment of the indebtedness of non-financial companies of the United Kingdom in the 10-year period from 2005 through 2014. Three samples are used. The first is composed of 1,045 companies, the second of the 309 companies with the highest degree of tangibility, and the third of the 309 companies with the lowest degree of tangibility. The empirical results present statistically significant evidence of the influence of the degree of tangibility on the speed of adjustment of the level of indebtedness. The speed of adjustment for the group of companies with greater tangibility is less than that of the group of companies with lesser tangibility, when the Blundell-Bond model - whose estimators are more efficient and less biased - is used. These results can contribute to the better management by companies of their capital structure.

Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector

Firms’ capital structure dynamics and ownership structure are two extensively studied subjects of research in corporate finance in recent years. This study combines these two branches of research and examines the impact of firms’ ownership structure on capital structure dynamics. More specifically, it examines the asymmetry in adjustment speed between group and stand-alone firms. The study uses data of 1,415 listed Indian manufacturing firms over the period of 2005–2013 (9 years) from ‘Capitaline Plus’ database. It specifies a partial adjustment model and uses the generalized method of moments (GMM) technique to estimate the adjustment speed. The results show that Indian manufacturing firms close about 30 percent of their leverage gap every year. For group firms, the annual speed of adjustment is about 20–29 percent whereas for stand-alone firms, it is about 38–41 percent. Lesser potential benefits or higher costs of adjustments may be responsible for slower adjustment speed of group firms than their stand-alone counterparts.

Causality and Asymmetric Price Transmission in the Distribution Channel of the Apple Market

The purpose of this study is to explore the dynamic properties of causality and asymmetric price transmission in the distributional channel of the apple market in Korea. Using the wholesale and retail price series of the apple market, we obtain the following results. First, the price trans-mission mechanism reveals the causal relationship channeling from the wholesale price to the re-tail price. Second, we find an asymmetric price transmission from the analysis using the threshold partial adjustment model. The retail price responds strongly when the wholesale price increases. On the other hand, the retail price shows sluggish adjustment when the wholesale price decreases. This study has shown a significant improvement of forecasting accuracy as the threshold partial adjustment model allows for asymmetric price transmission.

Revisiting the residential electricity demand in the United States: A dynamic partial adjustment modelling approach

In recent years, price policies and price changes derived from environmental regulations have played a more important role to promote residential energy conservation. Using recent annual state-level panel data for 48 states, we estimate a dynamic partial adjustment model for electricity demand elasticities on price and income in the residential sector. Our analysis reveals that in the short run, one unit price increase will lead to 0.142 unit of reduction in electricity use after controlling for the endogeneity of electricity price. Thus, raising energy price in the short run will not give consumers much incentive to adjust their appliances to reduce electricity use. However, in the long run, one unit price increase will lead to almost one unit consumption reduction, ceteris paribus. In addition, we find new evidence that for states of higher per capita GDP, raising the electricity price may be more effective to ensure a cut in consumption.

Sticky Dividends: A New Explanation

This paper investigates dividend dynamics using a generalized partial adjustment model. A novel feature of our model is that it allows managers to consider the earnings history via adaptive expectation formation of future earnings for their payout decisions. We show that firms adjust dividends to their target payouts much faster than previously documented. We also show that target dividends are predominantly driven by firm-specific effects, and tend to become significantly more stable when managers form future earnings prospects adaptively. Thus, sticky dividends could arise from their attempts to conform to the target payouts, thereby leading to higher dividend adjustment speeds.

How do neighboring peer companies influence SMEs’ financial behavior?

Recent research into corporate finances has found that the financial decisions of peer companies are related. Companies tend to “kept an eye” on the decisions of other peer companies, among other things, trying to overcome the limitations caused by the lack of information. This paper further examines these interactions including geographical proximity among companies. With this aim, we use a heterogeneous Partial Adjustment Model on a sample of 12,444 small and medium Spanish manufacturing industrial companies. We find strong nonlinearities in the adjustment processes of liquidity, indebtedness and profitability ratios associated with basic characteristics of the companies such as size, technology, age or financial imbalances. Our results indicate that the influence of the environment on the financial behavior of each company, and its responsiveness, vary in function of neighbor firms’ characteristics.

Ownership Structure and Dividend Strategy of Public Companies. Evidence from Poland

The aim of the article is to verify a hypothesis of the ownership structure influencing the dividend strategy of companies listed at both main stock and alternative markets of the Warsaw Stock Exchange. In order to evaluate the hypothesis, dynamic panel Lintner’s partial adjustment models with individual random effects have been estimated by means of instrument variables method, separately for each of the five company groups specified due to their ownership structure. Each one has systematically paid out dividends in the years 2012-2016. The results confirm that the dividend strategies of companies significantly depend on their ownership structure. Companies controlled by strategic investors had the highest dividend payout ratio, whereas the ones controlled by institutional investors — the lowest.

Cross-sectional variation of market efficiency

PurposeThis paper aims to provide evidence that market efficiency varies greatly across individual stock, and across market exchanges.Design/methodology/approachThree approaches, partial adjustment model, Dimson beta model and variance ratio test, are used on a large sample of US stocks.FindingsThis paper finds prices are closer to random walk benchmarks (i.e. more efficient) for stocks with better liquidity provision, frequent trading, greater return volatility, higher prices, larger market capitalizations and smaller trade sizes. These findings suggest that liquidity stimulates arbitrage activity, which, in turn, enhances market efficiency. Market efficiency also varies with information environment. The results show that stocks with greater information-based trading exhibit higher level of efficiency. Finally, market structure influences market efficiency. New York Stock Exchange stocks achieve higher level of efficiency than NASDAQ stocks do. The empirical results are robust and not driven by differences in stock attributes between the two markets.Research limitations/implicationsOverall, these results indicate that liquidity provision, stock attributes and market structure exert a significant impact on the realization of market efficiency.Practical implicationsIn addition, this paper is also relevant to both stock exchanges facing increased competition and to market regulators.Originality/valuePrior studies offer little evidence on the speed at which new information is impounded into the price. There is also limited evidence regarding how liquidity provision and market structure affect market efficiency. Using a transformation of the speed of price adjustment and other measurements as proxies for individual stock efficiency, this study may shed further lights on our understanding of market efficiency.

Ownership structure and dividend policy: application of Lintner's dividend model in Sri Lanka

This paper investigates the effect of ownership structure on the dividend policy of 77 Sri Lankan firms listed in the Colombo Stock Exchange over the period 2006-2014. The Lintner's full adjustment model and the partial adjustment model are used to examine the potential relationship between ownership structure and the dividend policy. We find that the ownership identity matters in determining the dividends according to Lintner's dividend model in Sri Lanka. Compared to the full adjustment model, the partial adjustment model is superior in explaining the variation in dividends with variables associated in different ownership structures. There is a negative association between institutional, managerial ownership structures and the dividend policy and a significant positive association between concentrated ownership structure and the dividend policy. In addition, the dividend in the preceding year is highly significant in explaining the succeeding year's dividend, thus confirming the stability of the dividend policy.

Modelling Short-run Money Demand for the US

There is a vast amount of empirical evidence concerning the cointegrating relationship between money demand, some kind of interest rate and income. In contrast to this, short-run dynamics are still opaque. In the existing literature, the return to steady state is modeled quite differently. The range goes from simple error correction models to non-linear approaches. Here a method is proposed for considering not only disequilibria between money demand and its steady state of only the last period but also those of the recent past in a parsimonious and economic meaningful way. Different to multicointegration, weights for cumulating of steady-state deviations are geometrically decreasing the more they are located in the past. This model possesses an ARMA (1,1) representation and leads to an ARMAX-model if combined with a conventional error correction model. This approach is shown to track money demand short-run dynamics better and more parsimony than the partial-adjustment model as used by Ball using the same data in order to allow for a comparison of results.

Employment Adjustment and Controlling-minority Ownership Structures: Providing Evidence for Stewardship Governance

This study investigates the influence of controlling-minority ownership structures (CMSes) on the employment adjustment of firms. We propose that entrepreneur-operated CMS firms typically develop a stewardship governance structure, which relies heavily on the social and psychological context of trust between management and employees, and demands employment stability. Accordingly, firms with more deeply ingrained CMSes are expected to have a lower employment adjustment speed. By applying a partial adjustment model to a sample of Taiwanese firms, we show that firms continually adjust to achieve a target employment level. The empirical proxy variables for the extent of CMSes are negatively related to the adjustment speed, particularly among firms with above-target employment or having consecutive periods of loss. Our results are robust after considering the assumption of lump-sum adjustment behavior. (JEL codes: D22, G34, J21)

The employment–population nexus and implications for sustainable economic development: insights from Irish regions using a partial adjustment model

In this paper, we use a partial adjustment model to analyse the relationship between employment and population growth in Irish district electoral divisions. We employ a spatial estimator to augment our partial adjustment model with a spatial lag and spatial error process. Our results indicate a dual relationship between employment and population growth, suggesting that not only do people follow jobs but also jobs follow people. This finding has implications for economic development policies, which typically focus solely on attracting jobs to a location. The results suggest that a dual-pronged approach to policy may be necessary including developing a region’s amenities to ensure that it is attractive to people and to stimulate population growth. We highlight how our analysis can be used to inform policy through the lenses of place-based and smart specialisation strategies.

Determinants of banks’ capital structure in the Pre-Regulation Era

The article explores the determinants of banks’ capital ratio in the Pre-Regulation Era where capital structure decisions were not influenced by deposit-insurance schemes, capital requirements, or high tax shields. The analysis builds on partial-adjustment capital-structure models estimated on the basis of panel data for all Danish commercial banks 1847–1919. The results suggest that banks with low levels of liquidity had a higher capital ratio in periods with financial instability. This enabled them to suffer larger losses and thereby reduce the risk of facing costs of financial distress. The article is the first bank-level study on capital structure in the Pre-Regulation Era.

Determinants of residential electricity demand: evidence from Japan

Purpose This paper aims to estimate electricity demand functions in Japan’s residential sector. Design/methodology/approach The authors use a partial adjustment model and empirically analyze regional residential electricity demand by using data on 47 Japanese prefectures. Findings The results reveal that the price elasticity of residential electricity demand during the analytical period (1990-2010) is remarkably different among prefectures, depending on the magnitude of floor space per household. In addition, this study finds that price elasticity is high compared with income elasticity, implying that residential electricity demand changes with rates. Furthermore, an analysis of factors influencing electricity demand in the residential sector shows that increasing electricity demand growth in each region can be attributable mainly to declining electricity rates and increasing number of households. Research limitations/implications These results suggest that monitoring the electricity rates and the number of households is important for forecasting future residential electricity demand at region. Originality/value The study considers the impact of the number of households on overall electricity demand and identifies other factors contributing to growth in residential electricity demand. The findings can be used to derive projections for future electricity demand.

Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

The Dynamics of Corporate Dividend Policy: Revisiting the Slow Adjustments of Dividends to Target Payouts

Past studies show that firms adjust dividends very slowly to their dividend targets. This paper reinvestigates the dynamics of corporate dividend policy using a generalized partial adjustment model. We show that firms adjust dividends to their target payouts much faster than previously documented. This study also shows that their target dividends are predominantly driven by firm-specific effects, and tend to become significantly more stable when managers form future earnings prospects adaptively. Thus, dividend-smoothing behavior could arise from their attempts to conform to the target payouts, thereby leading to higher dividend adjustment speeds.

Do Indonesian firms practice target capital structure? A dynamic approach

Purpose This study aims to investigate the dynamic aspects in the capital structure decisions of firms in Indonesia, offering an extension to the existing literature on Indonesia via a dynamic model, including the existence of target capital structure, the influencing factors, the speed of adjustments and the supporting theories to explain the findings. Design/methodology/approach This study uses a dynamic partial adjustment model estimated based on a generalized method of moments. Findings Indonesian firms do practice target capital structure and are influenced by firm-specific factors like profitability, business risk, firm size, liquidity and share price performance due to time-varying factors. A rapid adjustment toward target leverage is detected, thus supporting the existence of the dynamic trade-off theory (TOT). The pecking order theory (POT) also has significant influence, particularly after the new reformation of financing policy, where retained earnings are also preferred as a source of financing apart from merely external financing through bank loans. There are also traces of market timing influences where firms also seem to time their equity issuance. Research limitations/implications Despite relatively utilizing recent data and bigger sample firms compared to the previous limited studies on Indonesia, the results of this study, however, need to be cautiously interpreted. First, the sample chosen focused on listed firms, hence may not be generalized to all Indonesian firms, listed and unlisted. Second, the study does not separate firms by sectors and their leverage positions, that is under-levered and over-levered, so as to note that financial decisions may also be affected by the sector in which the firms operate and their leverage positions. These are to be considered in future research. Practical implications There is strong evidence that the corporate financing behavior of Indonesian firms is governed by the POT and TOT. Both are dealing with the function of debt. The financial sector reformation does have a positive impact on the banking sector, but not the local corporate bond market. Therefore, regulators and policymakers should bear in mind that banking as well as private bond market in Indonesia must be tailored in such a way that both could act as intermediaries of debt financing, as bond market represents an important component of a diversified financial sector. Originality/value This study fills the gap by providing an extension to the existing literature and a deeper insight of the capital structure of Indonesian firms using a more robust dynamic model.

The Basel III net stable funding ratio adjustment speed and systemic risk

The theory on the timing of liquidity trades highlights two contrasting rational expectations equilibria for the liquidity adjustment speed effect, namely an immediate-trading equilibrium (trade at the onset of the liquidity shock) and a delayed-trading equilibrium (trade at the last resort). Using a partial adjustment model and an annual data sample of US bank holding companies from 1991 to 2012, we investigate the effect of Net Stable Funding Ratio (NSFR) adjustment speeds on systemic risk. We find that banks with the immediate-trading equilibrium tend to adjust the NSFR quickly in response to the Basel III liquidity requirement, thereby, reducing systemic risk. With the same level of the NSFR, our findings suggest that only the adjustment speed exerts a negative impact on systemic risk. Our evidence shows that small banks strengthen the effects of the negative impact of the NSFR adjustment speed on systemic risk. Our study sheds light on a real-time indicator of the NSFR for Basel III revisions before its implementation in 2018.

Estimating the Supply Response of Maize in South Africa: A Nerlovian Partial Adjustment Model Approach

ABSTRACTMaize is the most important crop in South Africa, being both the major feed grain for livestock and the primary staple food crop for the majority of the population. Farmers’ production decisions regarding maize and their response to policy incentives are critical for national food security and regional trade. The aim of the study was to estimate the supply response of the South African maize sector to price and non-price incentives. A Nerlovian partial adjustment model was applied to historical time series data of area under maize cultivation, measured in hectares spanning from 1980-2012 to determine the supply response. Results indicate a short-run price elasticity of 0.24 and a long-run price elasticity of 0.36, signifying that maize farmers are less sensitive to price changes than non-price incentives. The results confirm that non-price incentives such as rainfall and technology seem to have more effect on maize supply than price incentives in South Africa. Given the findings, the study recommends policies and programmes that focus more on non- price incentives, such as technology and infrastructure development, investment in irrigation and research services, as a means of stabilising maize production in South Africa.