Speed of adjustment of capital structure: empirical study

We analyze the impact of firm-specific characteristics as well as economic factors on the speed of adjustment to the target debt ratio. Using different methods, we document speeds of adjustment ranging from 14.4% to 37%. The results indicate that the speed of adjustment is affected by business-cycle variables: The interaction term related to term spread reveals, as expected, faster adjustment in booms than in recessions and a negative relationship between short term spread and adjustment speed. We also show that the speed of adjustment becomes stationary when the increasing fractions of zero-debt firms are considered.