Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization

Do firms change their capital structure adjustment speed towards a target when adjustment costs change? Under a unified capital structure approach that combines the static trade-off and pecking order theories, firms minimize adjustment costs in setting their target adjustment speed. For below-target firms, the availability of share repurchases lowers the expected cost of increasing leverage towards the target. Extending the adjustment cost-based unified framework to the availability of share repurchases, which exogenously lowers the expected cost of leverage increases for below-target firms, I show the availability of share repurchases to result in these firms increasing their leverage adjustment speed towards a target. As predicted, this effect does not hold for the above-target firms.