An Empirical Research On The Effect Of Macroeconomic Conditions On Adjustment Speed Of Firms' Capital Structure

Dynamic capital structure theory suggests that even though firms have target capital structure, they will not make adjustment immediately and completely when there are the deviations because of the adjustment costs. The speed of capital structure adjustment was influenced with firm-specific characteristics and macroeconomic conditions during the adjustment process. This paper constructs a dynamic adjustment model and panel methodology to reveal interrelations between the adjustment speed and macroeconomic conditions variables. The sample comprises a panel of 445 listed firms in China over the years 1999 to 2007.Firstly, we predict the target debt ratios by estimate a Tobit regression model, and then we use the partial dynamic adjustment model to exam the significant of the macroeconomic conditions variables by the interaction terms. At last, this paper exam the applicability of theory of market timing and pecking order in China.Our empirical results for the impact of macroeconomic conditions on the speed of adjustment is significant. That is to say. The firms tend to adjust their leverage towards targets faster in good macroeconomic states. We also find support for the pecking order and market timing theories. What's more, the firms adjust the capital structure according to the macroeconomic states and consider to balance the cost and benefits on financial deficit and market timing and then to exploit.