Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 23: Dynamic Optimal Capital Structure and Technical Change

Hans Lööf ()
Additional contact information
Hans Lööf: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden

Abstract: The importance of capital structure is explored by comparing existing archetypes of financial systems through a new methodological application. Differences in firms’ cost of capital show that capital structure is relevant in R&D and other investment decisions. The conclusions are that 1) there are large and also unexpected cross-country differences in determinants to optimal capital structure; 2) observed leverage is often different from target in both equity (or stock market based) and debt (or bank based) dominated systems; 3) faster speed towards the target is observed in the equity based system indicating a higher flexibility.

Keywords: Capital structure; dynamic adjustment; panel data; optimal leverage; financial markets; cross-country comparison; technological change; creative destruction.

JEL-codes: C23; C51; G32; O16; O31

28 pages, December 9, 2004

Note: The paper is published in Structural Change and Economic Dynamics, Vol 15 Issue 14, pages 449-468 (December 2004)

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