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Market Imperfections, Macroeconomic Conditions, And Capital Structure Dynamics: A Cross-Country Study, Moonsoo Kang, Wei Wang, Ying Xiao
Market Imperfections, Macroeconomic Conditions, And Capital Structure Dynamics: A Cross-Country Study, Moonsoo Kang, Wei Wang, Ying Xiao
Business Faculty Publications
This paper investigates how “systematic” adjustment costs proxied by market imperfections and macroeconomic conditions affect capital structure dynamics in a cross-country setting. We document substantial variations in firms’ capital structure adjustments across countries and, particularly, over time. Consistent with adjustment costs impeding firms from rebalancing their capital structures, worse market imperfections are associated with slower speeds of adjustment (SOA) and larger leverage deviations. Intertemporally, capital structure adjustment is procyclical, with SOA increasing by 0.9 percentage point for a one-percentage-point increase in GDP growth rate. The procyclicality is attributable to good macroeconomic conditions mitigating market imperfections through channels of 1) facilitating …