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Speed of Adjustment and Financial Constraints: Evidence from the UK

Affiliations

  • Universiti Kuala Lumpur Business School, Malaysia
  • ICOLE –Univerisiti Kuala Lumpur – British Malaysia Institute, Malaysia
  • Ahmed Bin Mohammed Military College,, Qatar

Abstract


Our paper estimates the speed of moment adjustment based on the first difference of the lead (t+1) leverage levels (actual lead) and lag (t-1) leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for firm level data. We introduce an intrinsic limitation (financial constraints) to the model to test the impact on speed of adjustment and distance reduction. We find that financial constraints have a statistically and economically significant impact on rate of adjustment and distance reduction to target leverage levels.

Keywords

Capital Structure, Financial Constraints, Financial Econometrics, Speed of Adjustment, UK Firms.

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