How and When Do Firms Adjust Their Capital Structures toward Targets?
- Author(s): SOKU BYOUN
- Published: Nov 11, 2008
- Pages: 3069-3096
- DOI: 10.1111/j.1540-6261.2008.01421.x
If firms adjust their capital structures toward targets, and if there are adverse selection costs associated with asymmetric information, how and when do firms adjust their capital structures? We suggest a financing needs‐induced adjustment framework to examine the dynamic process by which firms adjust their capital structures. We find that most adjustments occur when firms have above‐target (below‐target) debt with a financial surplus (deficit). These results suggest that firms move toward the target capital structure when they face a financial deficit/surplus—but not in the manner hypothesized by the traditional pecking order theory.