eThesis - School of Business electronic theses

DANAMIC ASYMMETRIC ADJUSTMENT TOWARDS TARGET CAPITAL STRUCTURE -Evidence from UK, Germany and France

PURPOSE OF THE STUDY A recent topic in capital structure literature which has been discussed a lot is the dynamic capital structure adjustment. Previous studies have applied different approaches to analyze the target adjustment behaviors towards the optimal capital structure e.g. pecking order theory or trade-off theory. In this study, I examine the dynamic capital structure adjustment towards target leverage by considering the information asymmetry and adverse selection cost. I employ the target adjustment model introduced by Byoun (2008), which is based on pecking order theory and trade-off theory. I focus on investigating the partial asymmetric adjustments that vary depending on whether firms with above or below target leverage or whether firms with financial deficit or surplus. I also put emphasis on the analysis of impacts of financial orientations of economy on adjustment process and conduct the comparability of adjustment behaviors between market oriented economies and bank oriented economies. Furthermore, I take look at the capital structure determinants and their influences on target leverage.

DATA Sample in this study consists of all listed firms from UK, France and Germany except the financial and regulated firms in the Worldscope and Thomson One Banker databases between 1990 and 2010. The final dataset contains 20511 firm year observations for UK, 4937 firm year observations for Germany and 5079 firm year observations for France.

RESULTS In line with previous studies, relative fast adjustment speeds towards target leverage are found for firms in UK, Germany and France. Among the three countries, France has the fastest adjustment speed. The results show that there are asymmetric adjustments towards target leverage. Firms with below target leverage have higher adjustment speed towards their target leverage than firms with above target leverage. Furthermore, with above target leverage, firms with financial surplus make the adjustment faster towards the target than firms with financial deficit. But on condition of being below target leverage, firms seem to have faster adjustment speeds when facing the financial deficit than facing financial surplus. In addition, the empirical results show that in the sample countries, firms are more willing to use surpluses to pay back the above target debt rather than blow target debt and firms with blow target leverage are more probable to use debt to cover the financial deficit than firms with above target leverage. The results for determinants of optimal capital structure indicate that the trade-off theory can give better explanations of capital structure choices of firms in UK, Germany and France.