Abstract
We employ partial adjustment capital structure models to examine Mexican publicly traded firms’ capital structure adjustment behavior. In a partial adjustment model, a firm reverts its observed leverage towards target leverage and closes a proportion of the deviation from target within one year. The leverage speed of adjustment (SOA) depends on the trade-off between the costs and benefits of moving leverage towards target. The faster a firm can revert its leverage when shocked away from target, the higher the firm value. Our results show that Mexican firms’ SOA ranges from 13.8% to 17.4%, depending on three leverage proxies. Mexican firms revert their leverage towards target at a slower speed than firms in developed countries do, implying that Mexican firms operate sub-optimally longer than firms in developed countries. We also compare subsets of firms with characteristics that are expected to affect SOA. First, we find that financially unconstrained firms’ SOA is higher than the SOA of financially constrained firms. Second, for two out of the three leverage proxies, the SOA of over-levered firms is higher than that of under-levered firms. Third, farthest-away-from-target firms adjust faster toward target leverage than closest-to-target firms. Overall, our findings confirm the expected asymmetric SOA behavior of the subsets of companies examined. Finally, we examine the impact of states of the economy on firms’ capital structures. We find that leverage ratios of Mexican firms are counter-cyclical and that Mexican firms adjust leverage at faster speed during good economic states as measured by stock exchange market capitalization relative to country’s GDP, risk premium, and inflation.
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Notes
Since Economatica is not a well known financial database (relative to COMPUSTAT, for instance), we briefly describe the procedure followed to compile data in this study. We started by creating a list of all but financial firms trading or that have traded in the Mexican Stock Exchange (no utilities firms trade in this stock exchange). Using the Matrix query for data extraction in Economatica, we created matrices for each financial variable (e.g., the X vector) for the complete list of firms over the complete period of study. As in Cespedes et al. (2010), we collected values in USD, already translated from Mexican Pesos by Economatica using exchange rates published by the Mexican Central Bank. In addition to the financial variables, we also extracted number of shares outstanding as of the end of each year. Number of shares outstanding were multiplied by stock prices as of the end of each year to obtain firm market capitalization. These matrices were used to create the panel of firm-year observations. A total of 161 firms (out of 185 firms in our initial list) over 23 years (out of 27 initially in the database) had all information needed to compute the variables in this study.
https://databank.worldbank.org/reports.aspx?source=world-development-indicators; accessed on 09/27/2019.
SOA = \(1-\left(1-\delta \right)\)
Consistent with expectations from financial theory, estimates of market to book value and depreciation are negative, but not statistically significant, in two out of the three specifications. Higher MTB signals greater future investment opportunities or growth options, which Mexican firms may tend to protect by retraining leverage (Flannery and Rangan 2006; Cook and Tang 2010). Firms with more depreciation expenses have less need for the interest deductions provided by debt financing, meaning that lagged high depreciation may lead to low contemporaneous debt. The direction of influence of assets tangibility is not ex ante clear (Drobetz and Wanzenried 2006).
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Trejo-Pech, C.O., Kyaw, N.A. & He, W. Capital structure adjustment behavior of listed firms on the Mexican stock exchange. J Econ Finan 45, 573–595 (2021). https://doi.org/10.1007/s12197-021-09555-7
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DOI: https://doi.org/10.1007/s12197-021-09555-7
Keywords
- Capital structure
- Leverage adjustment speed
- Leverage and macroeconomic conditions
- Capital structure in developing economies
- Mexican firms