Target leverage and speed of adjustment along the life cycle of Eurpean listed firms

  1. Paula Castro 12
  2. María Teresa Tascón Fernández 1
  3. Borja Amor-Tapia 1
  4. Alberto de Miguel 2
  1. 1 Universidad de León

    Universidad de León

    León, España


  2. 2 Universidad de Salamanca

    Universidad de Salamanca

    Salamanca, España


Business Research Quarterly

ISSN: 2340-9444 2340-9436

Year of publication: 2016

Volume: 19

Issue: 3

Pages: 188-205

Type: Article

DOI: 10.1016/J.BRQ.2016.01.003 DIALNET GOOGLE SCHOLAR lock_openBULERIA editor

More publications in: Business Research Quarterly


This paper analyzes differences in target leverage and speed of adjustment across three life cycle stages of European listed firms: introduction, growth and maturity. We determine that profitability and tangibility are the most stable determinants, whereas growth opportunities and size exhibit changing effects across stages. The speed of adjustment does not increase as the firms evolve, as firms in introduction are able to adjust the fastest. Firms changing stage adjust leverage at a lower speed, and their target is more affected by profitability, primarily when the change is from growth to maturity. Finally, we confirm the existence of long-term debt targets, by providing evidence that the next-year target is a relevant factor to explain current debt when firms change from one stage to another

Funding information

Financial support from the Spanish Ministry of Science and Innovation (ECO2011-29144-C03-01) and support from the University of Leon (ULE2012-1) are gratefully acknowledged. Paula Castro also acknowledges the Grant FPU (AP2012-1959) from the Spanish Ministry of Education, Culture and Sports


Bibliographic References

  • Arellano M. Panel Data Econometrics 2003, Oxford University Press, Oxford.
  • Arellano M., Bover O. Another look at the instrumental variable estimation of error-components models. J. Econom. 1995, 68(1):29-51.
  • Aybar-Arias C., Casino-Martínez A., López-Gracia J. On the adjustment speed of SMEs to their optimal capital structure. Small Bus. Econ. 2012, 39(4):977-996.
  • Baltagi B.H. Econometric Analysis of Panel Data 2005, John Wiley and Sons, Chichester.
  • Barclay M.J., Smith C.W. The capital structure puzzle: another look at the evidence. J. Appl. Corp. Finance 1999, 12(1):8-20.
  • Blundell R., Bond S. Initial conditions and moment restrictions in dynamic panel data models. J. Econom. 1998, 87(1):115-143.
  • Bulan T., Yan Z. Firm maturity and the pecking order theory. Int. J. Bus. Econ. 2010, 9(3):179-200.
  • Byoun S. How and when do firms adjust their capital structures toward targets?. J. Finance 2008, 63(6):3069-3096.
  • Castro P., Tascón M.T., Amor-Tapia B. Dynamic analysis of the capital structure in technological firms based on their life cycle stages. Span. J. Finance Account. 2015, 44(4):458-486.
  • Chang X., Dasgupta S. Target behavior and financing: how conclusive is the evidence?. J. Finance 2009, 64(4):1767-1796.
  • Cho S.S., El Ghoul S., Guedhami O., Suh J. Creditor rights and capital structure: evidence from international data. J. Corp. Finance 2014, 25(April):40-60.
  • Cook D.O., Tang T. Macroeconomic conditions and capital structure adjustment speed. J. Corp. Finance 2010, 16(1):73-87.
  • Delmas M., Marcus A. Firms' choice of regulatory instruments to reduce pollution: a transaction cost approach. Bus. Polit. 2004, 6(3):1-20.
  • Dickinson V. Cash flow patterns as a proxy for firm life cycle. Account. Rev. 2011, 86(6):1969-1994.
  • Djankov S., Hart O.D., McLiesh C., Shleifer A. Debt enforcement around the world. J. Polit. Econ. 2008, 116(6):1105-1149.
  • Drobetz W., Pensa P., Wanzenried G. Firm characteristics, economic conditions and capital structure adjustments? Working Paper 2007, University of Hamburg, Hamburg, Germany.
  • Drobetz W., Wanzenried G. What determines the speed of adjustment to the target capital structure?. Appl. Financ. Econ. 2006, 16(13):941-958.
  • Elsas R., Florysiak D. Heterogeneity in the speed of adjustment toward target leverage. Int. Rev. Finance 2011, 11(2):181-211.
  • Fama E.F., French K.R. Industry costs of equity. J. Financ. Econ. 1997, 43(2):153-193.
  • Fama E.F., French K.R. Testing trade-off and pecking order predictions about dividends and debt. Rev. Financ. Stud. 2002, 15(1):1-33.
  • Faulkender M., Flannery M.J., Watson K., Smith J.M. Cash flows and leverage adjustments. J. Financ. Econ. 2012, 103(3):632-646.
  • Fischer E.O., Heinkel R., Zechner J. Dynamic capital structure choice: theory and tests. J. Finance 1989, 44(1):19-40.
  • Flannery M.J., Rangan K.P. Partial adjustment toward target capital structures. J. Financ. Econ. 2006, 79(3):469-506.
  • Frank M.Z., Goyal V.K. Trade off and pecking order theories of debt. Handbook of Corporate Finance: Empirical Corporate Finance 2008, Vol. 2:135-202. Elsevier, Amsterdam.
  • Frank M.Z., Goyal V.K. Capital structure decisions: which factors are reliably important?. Financ. Manag. 2009, 38(1):1-37.
  • Frelinghaus A., Mostert B., Firer C. Capital structure and the firm's life stage. S. Afr. J. Bus. Manag. 2005, 36(4):9-18.
  • González V.M., González F. Influence of bank concentration and institutions on capital structure: new international evidence. J. Corp. Finance 2008, 14(4):363-375.
  • González V.M., González F. Firm size and capital structure: evidence using dynamic panel data. Appl. Econ. 2012, 44(36):4745-4754.
  • Hackbarth D., Miao J., Morellec E. Capital structure, credit risk, and macroeconomic conditions. J. Financ. Econ. 2006, 82(3):519-550.
  • Hirsch J., Walz U. Financing decisions along a firm's life-cycle: debt as a commitment device. Eur. Financ. Manag. 2011, 17(5):898-927.
  • Hsiao C. Analysis of Panel Data 2003, Cambridge University Press, Cambridge.
  • Hovakimian A., Li G. Do firms have unique target debt ratios to which they adjust? Working Paper April 2009, Baruch College.
  • Hovakimian A., Li G. In search of conclusive evidence: how to test for adjustment to target capital structure. J. Corp. Finance 2011, 17(1):33-44.
  • Hovakimian A., Opler T., Titman S. The debt-equity choice. J. Financ. Quant. Anal. 2001, 36:1-24.
  • Huang R., Ritter J.R. Testing theories of capital structure and estimating the speed of adjustment. J. Financ. Quant. Anal. 2009, 44(2):237-271.
  • Jalilvand A., Harris R.S. Corporate behavior in adjusting to capital structure and dividend targets: an econometric study. J. Finance 1984, 39(1):127-145.
  • La Rocca M., La Rocca T., Cariola A. Capital structure decisions during a firm's life cycle. Small Bus. Econ. 2011, 37(1):107-130.
  • Laeven L., Valencia F. Systemic banking crises database. IMF Econ. Rev. 2013, 61(2):225-270.
  • LaPorta R., Lopez de Silanes F., Shleifer A. The economic consequences of legal origins. J. Econ. Lit. 2008, 46(2):285-332.
  • Leary M.T., Roberts M. Do firms rebalance their capital structures?. J. Finance 2005, 60(6):2575-2619.
  • Miguel A., Pindado J. Determinants of capital structure: new evidence from Spanish panel data. J. Corp. Finance 2001, 7(1):77-99.
  • Miller D., Friesen P.H. A longitudinal study of the corporate life cycle. Manag. Sci. 1984, 30(10):1161-1183.
  • Mueller D. A life cycle theory of the firm. J. Ind. Econ. 1972, 20(3):199-219.
  • Myers S. Determinants of corporate borrowing. J. Financ. Econ. 1977, 5:147-175.
  • Myers S.C. The capital structure puzzle. J. Finance 1984, 39(3):575-592.
  • Öztekin Ö., Flannery M.J. Institutional determinants of capital structure adjustment speeds. J. Financ. Econ. 2012, 103(1):88-112.
  • Pfaffermayr M., Stöckl M., Winner H. Capital structure, corporate taxation and firm age. Fisc. Stud. 2013, 34(1):109-135.
  • Rajan R.G., Zingales L. What do we know about capital structure? Some evidence from international data. J. Finance 1995, 50(5):1421-1460.
  • Roodman D. How to do xtabond2: an introduction to difference and system GMM in Stata. Stata J. (StataCorp LP) 2009, 9(1):86-136.
  • Ross S. The determination of financial structure: the incentive signaling approach. Bell J. Econ. 1977, 8(1):23-40.
  • Rubio G., Sogorb F. The adjustment to target leverage of Spanish public firms: macroeconomic conditions and distance from target. Rev. Econ. Apl. 2011, 19(57):35-63.
  • Rubio G., Sogorb F. Adjustment costs and the realization of target leverage of Spanish public firms. Span. J. Finance Account. 2012, 41(156):547-564.
  • Saddour K. The determinants and the value of cash holdings: evidence from French firms. Working Paper 2006-6 2006, 1-33. CEREG.
  • Shyam-Sunder L., Myers S.C. Testing static tradeoff against pecking order models of capital structure. J. Financ. Econ. 1999, 51(2):219-244.
  • Teixeira G., Santos M.J. Do Firms Have Financing Preferences Along Their Life Cycles? Evidence from Iberia 2014, Available at SSRN:
  • Titman S., Tsyplakov S. A dynamic model of optimal capital structure. Rev. Financ. Stud. 2007, 11(3):401-451.
  • Titman S., Wessels R. The determinants of capital structure choice. J. Finance 1988, 43(1):1-21.
  • Welch I. Two common problems in capital structure research: the financial-debt-to-asset ratio and issuing activity versus leverage changes. Int. Rev. Finance 2011, 11(1):1-17.
  • Wooldridge J.M. Econometric Analysis of Cross Section and Panel Data 2002, The MIT Press, Cambridge.