Speed of adjustment towards target leverage: evidence from a quantile regression analysis

Through employing a quantile regression approach and a dataset of 206,046 firm-year observations over the period 1970–2017 in the United States market, we examine the heterogeneity and asymmetry in the speed of adjustment (SOA) towards target leverage. We document that high- and low-levered firms adjust more quickly towards their target levels than do mid-levered firms. This holds true when total leverage and long-term leverage are considered in the analysis. Second, there is a difference in SOA between low- and high-levered firms, which points to SOA skewness. Third, when short-term leverage is considered in the analysis, the adjustment speed becomes smaller at varying levels of short-term debts. Finally, empirical evidence from total leverage and long-term leverage adjustments is consistent with the trade-off theory, whereas empirical evidence from short-term debt adjustments supports the pecking order theory.