An Empirical Research On The Long-term Dynamic Adjustment Of Firms' Capital Structure In China

Dynamic capital structure theory suggests that even though firms have target debt ratios, they will not make adjustment immediately and completely when there are the deviations because of the adjustment costs. The decisions that weather to adjust the debt ratios and the adjustment magnitude will be based on the tradeoffs between the costs and benefits of the adjustment.Based on the latest achievements of the capital structure theory and the empirical research, this paper constructs a comprehensive model to pursue the long-term dynamic trace of capital structure adjustment of the listed firms in China. Firstly, we estimate a Tobit regression model to predict the target debt ratios, and then we use the partial adjustment model to exam how financial deficit, market timing, the stock price changes, leverage deficit and the changes in the target debt ratio influence the dynamic adjustment of capital structure.The results indicate that financial deficit, market timing and the stock price changes indeed lead to deviations between the observed debt ratios and target debt ratios. Specially, the stock price changes have the strongest influence on capital structure changes. We also find that their effects are reversed over long horizons. These empirical results suggest that firms' capital structures tend to move towards their dynamic target debt ratios over some time although their histories strongly influence their capital structures.