The impact of financial position and industry characteristics on adjustment speed of capital structure

Subject Areas : Journal of Investment Knowledge

hossein assadi ¹ ( Department of Accounting and Finance, Management and Accounting Faculty, Shahid Beheshti University, Tehran, Iran. )
Elnaz Tajvidi ² ( Accounting Deparment, Faculty of Management and Accounting, University of Shahid Bhehshti )
Soheil Esmaeel Pour ³ ( Financial Management MSc )

Received: 2019-01-23 Accepted : 2021-01-31 Published : 2021-03-21

Keywords: Speed of adjustment, Industry Munificence, Industry Concentration, Cash Flow Imbalance, Industry Dynamism,

Abstract :

There are different theories in capital structure litreture witch describe financing behavior of capital structure. Trade-of and pecking order theories, as two famous capital structure theories, make diffrent explaination for capital structure adjustments. Recent studies find evidence that support the idea of using both theories simultaneously would help explaination ability of capital structure adjustment model. So in this way, examining adverse selection cost while moving toward optimal capital structure can make better designation of capital structure adjustment models. Using partial adjustment mode, this research investigate factors influence adjustment speed of capital structure toward optimal leverage ratio. We examine impact of cashflow inbalances, industry concentration, industry munificence and industry dynamism on speed of adjustment by using fixed effects regression and generalised method of moments. Our sample consists of 155 companies listed in Tehran Stock Exchange for the period from 1385 to 1394. We find that for above-target firms, adjustment for firms with financial surpluses is faster. For concentrated below-target firms, adjustment speed would be slower than other firms. Also dynamic above-target firms have strong tendency to adjust their leverage by reducing it.

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