Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

This paper investigates whether leveraged and zero-leverage firms pursue or not a debt target level and, if so, how fast they adjust to that target. We also investigate how the influence of firms' debt policy on capital structure speed of adjustment (SOA) changes with different financial systems, macroeconomic conditions, financial constraints and financial flexibility levels. Using the dynamic panel fractional estimator and a sample of European listed firms for the 1995-2016 period, we find that both zero-leverage and leveraged firms actively adjust to a target debt ratio. We also find that, in general, leveraged firms display a significantly higher SOA than zero leverage firms (27.6 % vs. 22.1 %), with only two exceptions: there are no significant differences when the analysis is restricted to financially constrained firms; and during the 2008 financial crisis zero-leverage firms adjusted significantly faster (46.8 %) than leveraged firms (25.6 %) and relative to non-crisis years (21.6 %).

Automated summary

This paper investigates whether leveraged and zero-leverage firms have a debt target level and if they actively adjust to that target, as well as how the influence of firms' debt policy on capital structure speed of adjustment (SOA) changes with different financial systems, macroeconomic conditions, financial constraints, and financial flexibility levels. Using a sample of European listed firms for the period 1995-2016 and the dynamic panel fractional estimator, the study finds that both zero-leverage and leveraged firms actively adjust to a target debt ratio. It also shows that, in general, leveraged firms have a significantly higher SOA compared to zero-leverage firms, with exceptions during financially constrained periods and the 2008 financial crisis when zero-leverage firms adjusted faster than leveraged firms.