Third, adjustments are non-constant. In this paper, we formulate a dynamic adjustment model. We specify and estimate the unobservable optimal capital structure using observable determinants. The optimal level varies, allowing for deviations of observed leverage from optimal leverage. Identification of determinants and estimation of the level of optimal capital structure and speed of adjustment allow for flexible determination and adjustment of the effective level of capital structure.
Empirical analysis is based on a large sample of Swedish micro and small firms.
We find that the observed capital structure exceeds the target, and that adjustment towards the target level is very slow. Before downloading any of the electronic versions below you should read our statement on copyright . Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.