Analysis of Determinants Affecting Speed of Adjustment to Target Leverage in Emerging Countries

The company’s financial sustainability and efficiency is related to two main concepts: does it approach its optimal financial leverage and how fast is this change. This study analyses the impact of different financial and macroeconomic measures on the speed of adjustment toward company’s optimal capital structure. Implementing a doubly-censored Tobit estimator (DPF) for a sample of BRICS companies, this study finds a positive influence of the company’s growth opportunities and profitability on its speed of adjustment to the target leverage. Moreover, company’s cash flow absolute value positively affects the speed of adjustment toward target leverage. Underlevered companies tend to have higher speed of adjustment than overlevered ones. Economic downturn also influences the speed of adjustment: companies from Brazil and China had higher SOA during the years of financial crisis. Finally, the intertemporal analysis shows that recent years companies tend to have lower speeds of adjustment toward target leverage, which are closer to the estimates for the companies in developed markets.