Journal ArticleDOI
Mean reversion in corporate leverage: evidence from India
Reads0
Chats0
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
Citations
More filters
References
More filters
Journal ArticleDOI
Mechanical mean reversion of leverage ratios
Long Chen,Xinlei Zhao +1 more
TL;DR: The authors cautions against studies that use the ability of the leverage ratio (or deviation from target leverage) to predict future leverage changes to draw inference on capital structure theories, arguing that leverage ratio of an average firm reverts to mean mechanically regardless of whether target leverage exists.
Journal ArticleDOI
Testing trade‐off and pecking order models of capital structure: does legal system matter?
TL;DR: In this paper, the authors examined the link between financing patterns, information asymmetry and legal traditions in 37 countries during the 1990-2004 period and found that firms across all countries adjust toward the target leverage, but with significantly different rate.
Journal ArticleDOI
The capital structure of Chinese listed firms: is manufacturing industry special?
Chin-Bun Tse,Timothy Rodgers +1 more
TL;DR: In this paper, a comparative study of leverage differences between manufacturing and non-manufacturing industry firms on both a cross-section and time-series basis is conducted, which is supplemented by a pooled regression analysis that models the factors determining leverage on an industry-by-industry basis.
Journal ArticleDOI
Corporate financing and target behavior: New tests and evidence
TL;DR: In this paper, the authors examined whether and to what extent firms' financing choices concur with the target-following behavior, and they found that firms' finance decisions are not generally consistent with systematic target following.
Journal ArticleDOI
Incorporating active adjustment into a financing based model of capital structure
TL;DR: In this paper, the authors propose and estimate a financing-based partial adjustment model that separates the effects of financing decisions on leverage evolution from mechanical evolution, and find expected SOA from active rebalancing (30%) more than doubles what is expected from mechanical mean reversion alone (13%).