Leverage Adjustments: Evidence from European Private Firms

• Applicant: Professor Dr. David Florysiak
• Subject Area: Accounting and Finance
• Term: from 2013 to 2014
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 232654594

How should firms finance their investments? Is there an optimal debt-equity mix that maximizes firm value? How do firms choose their capital structure? These fundamental economic issues have been driving capital structure research for more than fifty years. Empirical evidence for the relevance of competing capital structure theories are based nearly exclusively on the analysis of public firms. However most of all firms in the industrial nations are private and do not have access to public capital markets. Only little is known about the impact of public capital market access on the financing behavior of private firms.The proposed research project looks at the capital structure choice of private and public firms. The project is focused on the empirical test of the dynamic trade-off theory, in which firms dynamically adjust their capital structure toward a firm value maximizing (optimal) target. The speed of adjustment after deviations from the optimal capital structure depends on firm specific adjustment costs. Private and public firms differ along several dimensions that correspond to different adjustment costs. Apart from the access to public capital markets, they often differ in terms of their ownership and management structure or in their opacity for external market participants. I expect that private and public firms exhibit large differences in their adjustment behavior. The differential adjustment behavior and the factors explaining the differences shall be analyzed for a unique dataset of European firms.The results from this research project contribute to both the literature on heterogeneous adjustment speeds and the literature on the financing behavior of private firms. It is important to gain a better understanding of the behavior of private corporations in order to take appropriate economic policy measures that improve the incentives and availability of alternative financing sources and thereby promote efficiency and growth.

• DFG Programme: Research Fellowships
• International Connection: USA
• Host: Professor Ivo Welch, Ph.D.