A note on capital structure target adjustment: Indonesian evidence
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(Published version)
Date
2010
Authors
Reinhard, L.
Li, S.
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Journal article
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International Journal of Managerial Finance, 2010; 6(3):245-259
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<jats:sec><jats:title content-type="abstract-heading">Purpose</jats:title><jats:p>The purpose of this paper is to investigate whether existing capital structure target adjustment models are able to identify whether companies adjust their capital structures towards an (unobservable) target.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Design/methodology/approach</jats:title><jats:p>Existing capital structure target adjustment models are applied to a specific dataset by using different regression techniques (ordinary least square, fixed effect, Fama‐MacBeth, least square dummy variable “corrected”, SYS‐GMM).</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Findings</jats:title><jats:p>Existing capital structure target adjustment models are not able to identify whether companies adjust their capital structures towards a target or not. They might indeed indicate target adjustment behaviour when companies' capital structures actually move away from their targets.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Research limitations/implications</jats:title><jats:p>As target adjustment behaviour is often used as support for the trade‐off and against the pecking order theory, the “horse race” between both theories seems still to be open.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-heading">Originality/value</jats:title><jats:p>This paper highlights some of the fallacies of existing capital structure target adjustment models and demonstrates that the results obtained by those models can be highly misleading.</jats:p></jats:sec>
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Copyright [2010] Emerald Group Publishing Limited
Access Condition Notes: Postprint only available on Open Access