International Joint Polish-Swedish Publication Service

Leverage Mean-Reversion and Asymmetry of Speed Adjustment of Capital Structure

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Abstract

This research has investigated the effect of deviation from target leverage and financial deficit/surplus on corporate behavior in leverage adjustment by considering the possibility of changing assets. Recent studies have shown that leverage, regardless of financing policies, tends to mean. This phenomenon which is called mechanical mean-reversion affects the calculated speed of adjustment. This study examines the effect of leverage mean-reversion on leverage adjustment speed. A sample composed of 155 firms listed in the Tehran Stock Exchange (TSE) was investigated for the years 2005 to 2015. The generalized method of moment regression is used to examine the effect of deviation from target leverage and financial deficit/ surplus on the speed of adjustment and the bootstrap method is applied for determining the effect of leverage mean reversion. Our results show that firms that are at the top of target leverage and face financial deficits are more likely to adjust their capital structure compared to other companies. The results also show that eliminating the effect of mean-reversion of leverage reduces the leverage adjustment speed.

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