Determinants of capital structure and speed of adjustment to target capital structure: Evidence from US-listed companies

Abstract

This study investigates the factors affecting financing decisions and speed of adjustment of U.S. corporations from 2004 to 2015 with nearly 13,000 observations. The difference and system Generalised Method of Moments estimators are applied in the dynamic panel data to control for endogeneity problems. The findings reflect that size and non-debt tax shield experience significant and positive effects on capital structure, while profitability and liquidity show negative influences on total leverage. Furthermore, growth opportunities and uniqueness do not illustrate any pattern in impacting capital structures. The collaterals value of assets indicates weak effects on total leverage, whereas the collateral values and liquidity strongly and positively affect long-term debt. Furthermore, the results confirm the existence of optimal capital structure and the partial adjustment toward target debt ratios. It is exhibited that firms quickly adjust towards their optimal point with speeds of adjustment around 24% per year, suggesting small adjustment costs. These estimated rates have negligible variation between different measures of leverage. The determinants of adjustment speed that are expected to vary over time and across firms are also estimated. It is suggested that firms with larger size and distance take a longer time to restructure. Moreover, growth opportunities significantly negative influence speeds of adjustment by using market leverage, while profitability is an insignificant factor. This analysis may provide a deeper understanding of U.S. firms when making financial decisions to maximise firms’ value