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Econometrics, Business and Management.
Responding to the need to address heterogeneity in the speed of adjustment (SOA) to target leverage in a manner that reflects the fractional nature of leverage, we estimate SOAs across sub-samples of UK firms using the Dynamic Panel Fractional estimator (DPF). Using firm risk as a categorising variable, we show that riskier firms tend to adjust to target leverage at a faster rate, suggesting opportunity costs of being away from target leverage are higher for riskier firms. We also demonstrate the bias in SOAs as estimated using a model that does not account for the fractional nature of leverage, and show that this bias can result in spurious inferences being made when comparing SOAs across sub-samples. Our results cast doubt on existing evidence relating to heterogeneity in SOAs of UK firms.
Fitzgerald, J., Ryan, J. & Killian, S. (2017). Heterogeneity in the Speed of Adjustment to Target Leverage: A UK Study. BAFA Annual Conference with Doctoral Masterclasses, Herriot-Watt University, Edinburgh, Scotland, 10-12, April.