Speed of Adjustment to Target Capital Structure based on Interaction between Trade-off and Pecking order Theories in TSE

Abstract

Based on the dynamic trade-off theory, for the presence of costs of deviations from target leverage and costs of adjustments toward the target leverage, capital structure may not be necessarily compatible to the target structure, therefore, firms will take an action to adjust the capital structure only when its benefits are more than the costs. This study examines the speed of adjustment to target capital structure based on interaction between trade-off and pecking order theories in Tehran Stock Exchange over the period 1380–1393. For hypothesizes testing, this study uses Fixed Effect and Generalized Method of Moments methods. The results show that firms with both above-target leverage and a financing deficit have the fastest speeds of adjustment. Firms that tend to undertake quick adjustment have higher profitability and more growth opportunities. The evidence provides support for the dynamic trade-off theory of capital structure

Keywords

• Target Leverage
• Speed of adjustment
• Dynamic Trade-off Theory
• Costs of deviations
• Costs of adjustments