Total views : 297

Speed of Adjustment and Financial Constraints: Evidence from the UK


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


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.


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

Full Text:

 |  (PDF views: 283)


  • Byoun S. How and when do firms adjust their capital structure towards targets? Journal of Finance. 2008; 3:3069-96.
  • Leary M, Roberts M. Do firms rebalance their capital structure? Journal of Finance. 2005; 60:2575-619.
  • Chang X, Dasgupta S, Hillary S. Analyst coverage and financing decisions. Journal of Finance. 2006; 61:3009-48.
  • Binsbergen J, Graham J, Yang J. The Cost of Debt. Journal of Finance. 2010; 65:2081-2136.
  • Byoun S. How and when do firms adjust their capital structure towards targets? Journal of Finance. 2008; 3:3069-96.
  • Hussain H, Shamsudin M, Jabarullah N. Non linear speed of adjustment to lead leverage levels and the timing element in equity issues: Empirical evidence from the UK. Journal of Informatics and Mathematical Science. 2016; 8(1):49-65.
  • Byoun S. Financial flexibility and capital structure decision; 2011. Available from: SSRN:
  • DeAngelo H, DeAngelo L. Capital structure, payout policy and financial flexibility; 2007. Available from: SSRN:
  • Hussain HF, Shamsudin, barullah N. Non linear speed of adjustment to lead leverage levels: Empirical evidence from firm level data. Indian Journal of Science and Technology. 2015; 8(30):1-6.
  • Iqbal-Hussain H, Guney Y. Equity mispricing, financial constraints, market timing and targeting behaviour of companies, working paper.
  • Hussain HF. Shamsudin, Jabarullah N. Dynamic capital structure and factors influencing the speed of adjustment of UK firms. Indian Journal of Science and Technology.
  • Graham J, Harvey C. The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics. 2001; 60: 187-243.
  • Bancel F, Mittoo U. Cross-country determinants of capital structure choice: A survey of European firms. Financial Management. 2004; 33:103-32.
  • Brounen D, De Jong A, Koedijk K. Corporate finance in Europe: Confronting theory with practice. Financial Management. 2004; 33:71-101.
  • Iqbal-Hussain H. Non – Linearity in the timing of the equity market and debt – equity choice of UK firms. Journal of Business and Management. 2013; 13(4): 18 – 25.
  • Guney Y, Iqbal-Hussain H. Capital structure and IPO market timing in the UK. Behavioural finance working group conference: Fairness, Trust and Emotions in Finance. 2010. p.1-34.
  • Guney Y, Iqbal-Hussain, H. Capital structure and market timing in the UK: Deviation from target leverage and security issue choice. Multinational Finance Journal. 2009; 13:1-54.
  • Gujurati D. Basic Econometrics, McGraw Hills: International Edition; 2003.
  • Baltagi B. Econometric analysis of panel data, New York: John Wiley and Sons; 1995.
  • Fama E, French K. Testing the trade-off and pecking order predictions about dividends and Debt. Review of Financial Studies. 2002; 15:1-33.
  • Blundell R, Bond S. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics. 1998; 87: 115-143.
  • Flannery M, Rangan K. Partial adjustment and target capital structure. Journal of Financial Economics. 2006; 79(3):469-506.
  • Warr R, Elliott W, Koeter-Kant J, Oztekin O. Equity mispricing and leverage adjustment costs. Journal of Financial and Quantitative Analysis. 2012; 47:589-616.
  • Hovakimian A. Opler T, Titman S. The Debt-Equity choice. Journal of Financial and Quantitative Analysis. 2001; 36:1-24.
  • Hovakimian A, Li G. In search of conclusive evidence: How to test for adjustment to target capital structure. Journal of Corporate Finance. 2011; 17:33-44.
  • Alti A. How persistent is the impact of market timing on capital structure, Journal of Finance. 2006); 61(4):1681-1710.
  • Windmeijer F. A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics. 2005; 126:25-51.
  • Fama E, MacBeth. Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy. 1973; 81:607-636.
  • Hussain H. Do firms time the equity market in a non-linear manner? Empirical evidence from the UK. International Journal of Business and Finance Research. 2014; 8:63-74.
  • White H. A Heteroskedastic-consistent covariance matrix estimator and a direct test of Heteroskedasticity, Econometrica. 1980; 48:817-838.
  • Rogers W. Regression standard errors in clustered samples. Stata technical bulletin. , 1993; 13:19-23


  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.