Does the economic cycle of the economy affect the speed of adjustment?

Abstract

Macroeconomic conditions influence the financing choices of companies, affecting their capital structure. Although the concept of target leverage has been and is still widely discussed in the empirical literature, several results show the tendency of companies to target a certain capital structure following deviations from it. The objective of this analysis is to observe how variations in the business cycle, from 1993 to 2023, influenced the tendency of companies to limit deviations from the target. The analysis conducted showed that the speed of adjustment tends to be higher in positive stages of the economy, regardless of whether the companies have a bond rating or not, and that the deviation from target leverage tends to expand in periods of crisis. Besides this, other factors are crucial in influencing this behaviour of companies. In particular, smaller companies in the sample approach the target more quickly. Following shocks, the greater the distance to the target, the greater the adjustment effort of the companies in the sample. Overall, the results show that although macroeconomic variables influence the ability of companies to approach the target, firm-specific characteristics also play an important role in the analysis of the speed of adjustment.

Date of Award	24 Jun 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)