Partial Adjustment toward Target Capital Structures

  title={Partial Adjustment toward Target Capital Structures},
  author={Mark J. Flannery and Kasturi P. Rangan},
The literature provides conflicting assessments about firms’ leverage decisions. We argue that econometric mis-specifications have influenced many past conclusions, because the estimated regression models implicitly impose strong, but unwarranted, assumptions on the data. This study estimates a partial-adjustment model for a firm’s leverage decision. Our model recognizes that a firm’s target capital structure can change over time and that (unanticipated) share price changes also have on effect… CONTINUE READING
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