Deviation from target capital structure, cost of equity and speed of adjustment

Zhou, Qing, Tan, Kelvin Jui Keng, Faff, Robert and Zhu, Yushu (2016) Deviation from target capital structure, cost of equity and speed of adjustment. Journal of Corporate Finance, 39 99-120. doi:10.1016/j.jcorpfin.2016.06.002

Author Zhou, Qing
Tan, Kelvin Jui Keng
Faff, Robert
Zhu, Yushu
Title Deviation from target capital structure, cost of equity and speed of adjustment
Journal name Journal of Corporate Finance   Check publisher's open access policy
ISSN 0929-1199
Publication date 2016-08
Year available 2016
Sub-type Article (original research)
DOI 10.1016/j.jcorpfin.2016.06.002
Open Access Status Not Open Access
Volume 39
Start page 99
End page 120
Total pages 22
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Collection year 2017
Language eng
Abstract In this paper, we analyze the impact of leverage deviation (i.e., actual minus target optimal leverage) on the implied cost of equity capital. Our special focus is on whether (and to what extent) the sensitivity of the cost of equity to leverage deviation, influences the speed with which firms adjust their financial leverage toward the target. Confirming theoretical predictions, we find that the cost of equity is positively related to leverage deviation and that firms whose cost of equity is more sensitive to leverage deviation exhibit faster speed of adjustment toward the target. Collectively, our findings imply that capital structure targeting is not equally important to all firms. Indeed, we argue that while evidence of the trade-off theory will tend to be obscured in broad samples, it can hold strongly in meaningfully chosen sub-samples of firms — namely, those characterized by high sensitivity of equity cost to leverage deviation.
Keyword Leverage deviation
Cost of equity
Speed of adjustment
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
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Created: Mon, 20 Jun 2016, 18:34:26 EST by Karen Morgan on behalf of UQ Business School