Macroeconomic Environment, Financial Constraints And Dynamically Adjust The Capital Structure

Dynamic capital structure theory shows that firms have target capital structure.However, they will just make partial adjustment to the target capital structure because ofthe adjustment costs when there are the deviations. Therefore, the real capital structureoften deviates from the target capital structure. This paper constructs a partial dynamicadjustment model, combining with the financial constraints to research the impacts ofmacroeconomic conditions on the speed of capital structure dynamic adjustment of thecompanies at different financial constraints level. The sample comprises a panel of691listed firms in China over the years2000to2011.First of all, this paper fits the target capital structure, based on which, this papercalculate the adjustment speed, finding that the majority of the listed Chinese company areadjusting their real capital structure to the target capital structure. Then this paperconstructs the integrated dynamic partial adjustment capital structure model to investigatethe effect of each macroeconomic factor on the adjustment speed by entering themacroeconomic factors separately into the model. The macroeconomic factors this paperchooses are the real GDP growth rate, loan interest rate and the real growth rate of creditscale. Finally, based on the quartile of the macroeconomic variable，this paper define themacroeconomic environment as the good one and the bad one, and then discuss theadjustment speed under different economic environment.The empirical results show that, firstly, firms adjust their capital structure towardtarget leverage faster in good macroeconomic states. Considering financial constraints,financially unconstrained firms are more sensitive to the condition of the economy thanfinancially constrained firms. When the economy is in the good state, the adjustment speedis at around0.2, slower than that in mature capital markets, such as Britain and the UnitedStates. Chinese listed firms face higher adjustment costs than them. Secondly, the changeof credit quota and loan interest rate have significant impact on the adjustment speed. Thelower the cost of loans, the more quickly the companies adjust to their target capitalstructure. The larger the credit scale, the more quickly the companies adjust to their targetcapital structure.Financially unconstrained firms are more sensitive to the borrowing costs,paying attention to the cost-benefit principle.This paper doesn’t get the conclusion thatfinancially constrained firms are more sensitive to credit scale.