Determinants of the target capital structure and adjustment speed - evidence from Asian capital markets

Abstract

Even though Asia is a major region of the world economy, robust tests of the tradeoff theory on corporate capital structure do not exist for Asian capital markets. The aim of this study is to close this gap in the literature by providing an econometrically robust and geographically comprehensive analysis of the determinants of capital structure and the speed of adjustment towards the target capital structures in Asian capital markets. We use a homogeneous panel of 1301 companies with market capitalizations of at least 1 bn. USD, listed on fourteen Asian stock exchanges. Our main findings are based on a GMM-estimation for the determinants of capital structure, respectively System-GMMestimation for the speed of adjustment. Robustness is provided by a modification of the regression model as well as by reporting OLS-, and TSLS-estimations. We contribute to the existing literature by finding strong evidence that Asian companies pursue target capital structures during the period 1995 – 2009. The convergence towards target capital structures in Asian firms is estimated at a speed ranging from 27% to 39%, consistent with international evidence on the speed of adjustment to target capital structures. Additionally, our results provide evidence that industry-fixed effects do influence capital structure choices in Asia.

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