Asymmetric adjustment toward optimal capital structure: Evidence from a crisis

Viet Anh Dang, Minjoo Kim, Yongcheol Shin

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We employ dynamic threshold partial adjustment models to study the asymmetries in firms' adjustments toward their target leverage. Using a sample of US firms over the period 2002-2012, we document a negative impact of the Global Financial Crisis on the speed of leverage adjustment. In our subperiod analysis, we find moderate evidence of cross-sectional heterogeneity in this speed, which seems more pronounced pre-crisis and provides little support for the financial constraint view. Over the pre-crisis period, more constrained firms, such as those with high growth, with large investment, of small size, and with volatile earnings, adjust their capital structures more quickly than their less constrained counterparts. These firms rely heavily on external funds to offset large financing deficits, suggesting that their higher adjustment speeds may be driven by lower adjustment costs that are shared with the transaction costs of accessing external capital markets. During the crisis, the speed of adjustment varies with the deviation from target leverage: only firms with sufficiently large deviations attempt to revert to the target, albeit slowly. Overall, our results provide new evidence of both cross-sectional and time-varying asymmetries in capital structure adjustments, which is consistent with the trade-off theory. © 2014 Elsevier Inc.
Original languageEnglish
Pages (from-to)226-242
Number of pages16
JournalInternational Review of Financial Analysis
Publication statusPublished - 2014


  • Capital structure
  • Dynamic panel threshold model
  • Global financial crisis
  • Partial adjustment model
  • Trade-off theory


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