Risk and maturity effects on Iberian Companies’ Capital Structure Speed of Adjustment

This study analyzes the financial market and default risk effects on firms’ capital structure speed of adjustment (SOA), investigating the determinants of a time-varying target capital structure. We provide empirical analysis on the effect of risk on the SOA, since there is limited evidence on this subject, using a censored estimator in our approach. We consider a sample of 1405 Iberian (Portugal and Spain) companies, over the years from 2010 to 2017 applying a two-step model (censored Tobit and dynamic GMM) on the panel data collected for traditional determinants of the capital structure and exploring the effects of the categorical variables size, age, default risk and returns volatility. We find that Iberian firms have extremely high adjustment costs to the target leverage and a very small SOA, being the SOA greater for under-levered firms. Results are robust for different specifications, having important implications for both researchers and decision-makers.