The Speed of Adjustment toward Target Capital Structure Evidence from Market-based and Bank-based Financial Systems
Post by MSF Chula at Tuesday, 8 August 2017 10:35 AM

This study investigates the speed of adjustment between market-based (U.K.) and
bank-based (Germany) financial systems. Inconsistent with the suggestion of Modigliani
and Miller (1958), the result reveals that the capital structure is relevance to firm value. The
result presents that when firms operate above their target debt ratio, firms of all types and
sizes in a market-based system have a greater speed of adjustment than firms in a bankbased
system. This is consistent with the notion that more active capital markets can reduce
the level of asymmetric information problems. Then firms in a market-based system can
avoid a probability of bankruptcy risk better than firms in a bank-based system. On the other
hand, when firms operate under their target debt ratio, the result shows that the speed of
adjustment is not different between market-based and bank-based financial systems.
However, the result is changed when high profit firms are examined. The result reveals that
debt monitoring is more important for high profit firms in a market-based system than high
profit firms in a bank-based system. This is consistent with the notion that bank monitoring
in a bank-based system can help shareholders to reduce agency costs of free cash flows.

Last updated at Tuesday, 8 August 2017 10:35 AM