This reasoning implies that when firms are below their target leverage ratios, they should be able to move toward their targets faster when the banking sector is competitive.
(2012) and report results separately for firms below (second column) and above (third column) their target leverage ratios. The speed of adjustment for these two sets of firms is strikingly different (25.5% for underlevered firms vs.
When firms are underlevered they can move toward their target leverage ratios more quickly when banks compete to lend.
Therefore, if firms are below their target leverage ratios, they should be able to move toward their targets faster when the banking sector is competitive.
In a broader perspective, dynamic models have been progressively employed by researchers to capture the effects of adjustment costs and of changing target leverage ratios along time.
Based on this result consistent across the different specifications, we infer that Chilean and Mexican managers are more avid to close the gap between actual and target leverage ratios than their Brazilian equivalents.
Results from the duration model do not provide evidence that country idiosyncrasies have significant impact over firms' active rebalancing toward target leverage ratios, given that Brazilian, Chilean and Mexican firms do not consistently differ in terms of the duration of time intervals without major capital structure changes.
Liu, L., 2005, "Do Firms Have Target Leverage Ratios? Evidence from Historical Market-to-Book and Past Returns," Hong Kong University of Science and Technology, Working Paper.
We also control for the impact of the target leverage ratio on financing decisions using the approach outlined in Hovakimian, Opler, and Yitman (2001) who examine the debt-equity choice.
ratio (TDB) Deviation from Actual leverage ratio (TDB)--Target debt target leverage ratio. Target leverage ratio is the ratio (DEVI) fitted value of the regression where TDB is regressed on the vector of control variables (X) in Equation (10), together with year and industry indicator variables.
The deviation from the target is Lev at t - 1 minus the target leverage ratio. The target leverage ratio is the fitted value of the regression where the leverage ratio is regressed upon the vector control variables employed by Baker and Wurgler (2002), together with the year and industry dummy variables.