Journal ArticleDOI
Mean reversion in corporate leverage: evidence from India
TLDR
In this paper, the authors make use of a major "shock" to the debt ratios as an event and think of a subsequent reversion as a movement toward a mean or target debt ratio.Abstract:
Recent papers on target capital structure show that debt ratio seems to vary widely in space and time, implying that the functional specifications of target debt ratios are of little empirical use. Further, target behavior cannot be adjudged correctly using debt ratios, as they could revert due to mechanical reasons. The purpose of this paper is to develop an alternative testing strategy to test the target capital structure.,The authors make use of a major “shock” to the debt ratios as an event and think of a subsequent reversion as a movement toward a mean or target debt ratio. By doing this, the authors no longer need to identify target debt ratios as a function of firm-specific variables or any other rigid functional form.,Similar to the broad empirical evidence in developed economies, there is no perceptible and systematic mean reversion by Indian firms. However, unlike developed countries, proportionate usage of debt to finance firms’ marginal financing deficits is extensive; equity is used rather sparingly.,The trade-off theory could be convincingly refuted at least for the emerging market of India. The paper here stimulated further research on finding reasons for specific financing behavior of emerging market firms.,The results show that the firms’ financing choices are not only depending on their own firm’s specific variables but also on the financial markets in which they operate.,This study attempts to assess mean reversion in debt ratios in a unique but reassuring manner. The results are confirmed by extensive calibration of the testing strategy using simulated data sets.read more
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Journal ArticleDOI
Testing static tradeoff against pecking order models of capital structure
TL;DR: In this paper, the authors compare traditional capital structure models against the alternative of a pecking order model of corporate financing, which predicts external debt financing driven by the internal financial deficit, has much greater time-series explanatory power than a static trade-off model which predicts that each firm adjusts gradually toward an optimal debt ratio.
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Dynamic Capital Structure Choice: Theory and Tests
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Partial Adjustment Toward Target Capital Structures
TL;DR: In this article, the authors consider the effect of share price changes on market-valued leverage and conclude that firms do have target capital structures, as opposed to market timing or pecking order considerations, which explains a majority of the observed changes in capital structure.
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Partial adjustment toward target capital structures
TL;DR: A more general, partial-adjustment model of firm leverage indicates that firms do have target capital structures as mentioned in this paper, and the typical firm closes about one-third of the gap between its actual and its target debt ratios each year.
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Do Firms Rebalance Their Capital Structures
TL;DR: The authors empirically examined whether firms engage in dynamic rebalancing of their capital structures, while allowing for costly adjustment, and found that firms respond to changes in their equity value, due to price shocks or equity issuances, by adjusting their leverage over the two to four years following the change.