SSE/EFI Working Paper Series in Economics and Finance
No 440:
The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms
Almas Heshmati ()
Abstract: Capital structure studies have generally been aimed at
studying the determinants of optimal leverage. Empirically, the focus is,
however, on studying the association between observed leverage and a set of
explanatory variables. This approach has a number of shortcomings. First,
the observed leverage deviates from the optimal leverage. Second, the
empirical analyses are static. Third, adjustments are non-constant. In this
paper, we formulate a dynamic adjustment model. We specify and estimate the
unobservable optimal capital structure using observable determinants. The
optimal level varies, allowing for deviations of observed leverage from
optimal leverage. This model is specified such that the speed of adjustment
towards the optimal level is firm- and time-specific. Identification of
determinants and estimation of the level of optimal capital structure and
speed of adjustment allow for flexible determination and adjustment of the
effective level of capital structure. Empirical analysis is based on a
large sample of Swedish micro and small firms. We find that the observed
capital structure exceeds the target, and that adjustment towards the
target level is very slow.
Keywords: Capital structure; dynamic adjustment; optimal leverage; micro and firms; (follow links to similar papers)
JEL-Codes: C23; C51; G32; (follow links to similar papers)
36 pages, April 2, 2001
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- This paper is published as:
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Heshmati, Almas, (2002), 'The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms', Research in Banking and Finance, Vol. 2, pages 199-241
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