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Dynamic capital structure and partial adjustment frameworks

University of British Columbia

I compare ordinary least squares and the Kalman filter as possible estimation tools for partial adjustment models of dynamic capital structure. I find that the latter is more suited, as it can handle forms of endogeneity and measurement error. While the firms in my sample adjust their capital structure at different rates, I do not find any evidence that this adjustment is made according to a time-varying target. Furthermore, I construct a simple theoretical dynamic model with fixed capital adjustment costs. By investigating time series generated by this model, I conclude that partial adjustment frameworks may be inadequate for estimation. When fixed costs are present, estimates of a firm's speed of capital adjustment are biased.

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2009-12-23

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http://hdl.handle.net/2429/17276

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University of British Columbia

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