{"title":"Fast or slow: Unveiling the speed of market leverage adjustment in China","authors":"Yujun Lian, Jun Wang, Manqi Huang","doi":"10.1016/j.pacfin.2024.102423","DOIUrl":null,"url":null,"abstract":"<div><p>In the capital structure literature, the practice of using market leverage to estimate the speed of adjustment (SOA) to target capital structure is debated. We empirically examine the capital structure adjustment behavior of Chinese firms using the SOA decomposition model proposed in Yin and Ritter (2020). Our findings suggest an overestimation of SOA towards the target market capital structure in Chinese firms, with a pre-correction speed of around 19.6% and a post-decomposition active adjustment speed of merely 7.4%. This overestimation is attributed to significant price fluctuations in the stock market. We further explore the cross-sectional differences and time-series variation in SOA to confirm our findings, advising caution in the use of market leverage for robustness tests. Our results imply that the trade-off and pecking order theories have limited explanatory power for the capital structure decisions of Chinese firms, while market timing theory appears to be more applicable.</p></div>","PeriodicalId":48074,"journal":{"name":"Pacific-Basin Finance Journal","volume":null,"pages":null},"PeriodicalIF":4.8000,"publicationDate":"2024-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Pacific-Basin Finance Journal","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0927538X24001744","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
In the capital structure literature, the practice of using market leverage to estimate the speed of adjustment (SOA) to target capital structure is debated. We empirically examine the capital structure adjustment behavior of Chinese firms using the SOA decomposition model proposed in Yin and Ritter (2020). Our findings suggest an overestimation of SOA towards the target market capital structure in Chinese firms, with a pre-correction speed of around 19.6% and a post-decomposition active adjustment speed of merely 7.4%. This overestimation is attributed to significant price fluctuations in the stock market. We further explore the cross-sectional differences and time-series variation in SOA to confirm our findings, advising caution in the use of market leverage for robustness tests. Our results imply that the trade-off and pecking order theories have limited explanatory power for the capital structure decisions of Chinese firms, while market timing theory appears to be more applicable.
在资本结构文献中，使用市场杠杆估算目标资本结构调整速度（SOA）的做法备受争议。我们利用 Yin 和 Ritter（2020）提出的 SOA 分解模型对中国企业的资本结构调整行为进行了实证检验。我们的研究结果表明，中国企业对目标市场资本结构的SOA存在高估，修正前的速度约为19.6%，分解后的主动调整速度仅为7.4%。这种高估归因于股市价格的大幅波动。我们进一步探讨了 SOA 的横截面差异和时间序列变化，以证实我们的结论，同时建议在使用市场杠杆进行稳健性检验时要谨慎。我们的研究结果表明，权衡理论和啄食顺序理论对中国企业资本结构决策的解释力有限，而市场时机理论似乎更适用。
期刊介绍：
The Pacific-Basin Finance Journal is aimed at providing a specialized forum for the publication of academic research on capital markets of the Asia-Pacific countries. Primary emphasis will be placed on the highest quality empirical and theoretical research in the following areas: • Market Micro-structure; • Investment and Portfolio Management; • Theories of Market Equilibrium; • Valuation of Financial and Real Assets; • Behavior of Asset Prices in Financial Sectors; • Normative Theory of Financial Management; • Capital Markets of Development; • Market Mechanisms.
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