Speed of adjustment: Evidence from Borsa Istanbul

Abstract

In this study, we investigate the speed of adjustment for leverage ratios of firms listed on Borsa Istanbul, in order to investigate the prediction of the trade-off theory, regarding capital structure rebalancing. For this purpose, we estimate the speed of adjustment by using Generalized Method of Moments system estimation technique. The results of this estimation suggest the speed of adjustment as approximately 29%. This significant speed of adjustment is consistent with the prediction of trade-off theory, which suggests that firms follow target capital structures and when the firms' leverage ratios deviate from these targets; they make financial decisions with the goal of closing the gap between the previous year's leverage and target leverage of the current period.

Keywords

• Target capital structure
• Speed of adjustment
• Trade-off theory