FINANCIAL FLEXIBILITY AND THE SPEED OF TARGET ADJUSTMENT OF CAPITAL STRUCTURE: PANEL DATA ANALYSIS

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Ziad Mohammad Zurigat ORCID logo

https://doi.org/10.22495/rcgv6i4c3art6

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Abstract

This study aims at investigating the impact of financial flexibility on the speed of target adjustment of capital structure. For this purpose, the partial adjustment model with interaction dummy term is used and tested using panel data analysis for a sample of 47 industrial firms listed in Amman Stock Exchange over the period of 1996 to 2014. The results of Random and fixed effects models showed that the target reversion of capital structure occurs slowly. The results also revealed that financial flexible firms adjust their leverage ratio much faster than less flexible firms. The tendency of making target reversion increases when inflexible firms have leverage above its target level, while inflexible firms with above-target leverage ratio adjust their leverage faster than flexible firms. These findings suggest that financial flexibility plays an important role on determining the financing decisions in Jordanian industrial firms. Moreover, they suggest how large bankruptcy risk is critical for industrial Jordanian firms. Hence, Industrial Jordanian firms should take into consideration the financial flexibility when they set their financial decisions to avoid the loss of profitable investment opportunities or experience the financial distress.

Keywords: Capital Structure, Financial Flexibility, Panel Data, Amman Stock Exchange

How to cite this paper: Zurigat, Z. M. (2016). Financial flexibility and the speed of target adjustment of capital structure: Panel data analysis. Risk governance & control: financial markets & institutions, 6(4-3), 410-419. https://doi.org/10.22495/rcgv6i4c3art6