1154744

research-article2023
AUM0010.1177/03128962231154744Australian Journal of ManagementNguyen et al.

Article

Australian Journal of Management

Adjustment speed of capital

2024, Vol. 49(3) 448­–477
© The Author(s) 2023

structure: A literature survey of Article reuse guidelines:

empirical research sagepub.com/journals-permissions

https://doi.org/10.1177/03128962231154744
DOI: 10.1177/03128962231154744
journals.sagepub.com/home/aum

Ha Thanh Nguyen , Balachandran Muniandy

and Darren Henry
Department of Accounting, Data Analytics, Economics and Finance, La Trobe Business School, La Trobe University,
Melbourne, VIC, Australia

Abstract
We synthesize empirical studies on the determinants of the heterogeneity in the adjustment
speed (speed of adjustment; SOA) of capital structure. These determinants are categorized
into six groups, namely, (1) firm-specific characteristics, (2) financial reporting and managerial
incentives, (3) corporate governance, (4) informal institutions, (5) financial market attributes
and (6) economy-wide attributes. From this analysis, we perceive important potential research
questions linked to identifying channels associated with the costs and frictions explaining SOA
heterogeneity, including financial reporting quality aspects, firm internal and external monitoring
mechanisms and institutional and cultural elements. Interesting avenues for future research also
include considering SOA dynamics for comparable cross-country samples and the investigation of
the subsequent consequences of capital structure adjustments.
JEL Classification: G30, G32, G34, M41

Keywords
Capital structure dynamics, corporate governance, financial markets, financial reporting,
informal institutions, speed of leverage adjustment

1. Introduction
In a setting of complex capital structure dynamics, the question of how fast firms adjust their capi-
tal structure towards the optimal level has posed an unresolved puzzle for academics and practi-
tioners around the world (Huang and Ritter 2009; Zhang et al., 2020b; Zhou et al., 2016). To

*Ha Thanh Nguyen is now affiliated to School of Accounting, College of Business, University of Economics Ho Chi Minh City

Corresponding author:
Balachandran Muniandy, Department of Accounting, Data Analytics, Economics and Finance, La Trobe Business School,
La Trobe University, Melbourne, VIC 3086, Australia.
Email: [email protected]

Final transcript accepted 15 January 2023 by Tom Smith (AE Finance).

Nguyen et al. 449

confront this challenge and develop a better understanding of how a firm’s capital structure evolves
over time, the last 20 years have witnessed a boom in research about the heterogeneity in the
adjustment speed of capital structure (speed of adjustment, hereafter SOA; An et al., 2015; Chang
et al., 2014; Dang et al., 2019). However, the tremendous speed of knowledge production in the
SOA literature makes it challenging for researchers to maintain currency with the state-of-the-art
research and to be at the forefront so that they can both build their research on, and relate it to, the
existing knowledge in the SOA literature. Hence, the provision of a literature review of empirical
studies addressing SOA heterogeneity is more relevant than ever.
From a practical perspective, the period since the global financial crisis in the late 2000s has
seen strong bull market conditions on global financial markets as well as a low interest rate setting
in most economies, which are consistent with an environment of reduced frictions and costs and
increased flexibility for firms in issuing both equity and debt capital. Consequently, revisiting SOA
decision-making during this period may provide an interesting contrast to historical SOA out-
comes. New fund-raising avenues, advancements associated with blockchain and digital currency
technologies, the development of new types of debt securities, growth in the size and liquidity of
corporate debt markets and the increasing tendency of companies to repurchase shares also have
implications for how corporate capital structures are managed.
Although several previous reviews have provided useful insights into the basis and implications
of a firm’s capital structure choice (Kumar et al., 2020; Parsons and Titman, 2008), these reviews
have not taken SOA as their primary focus. Therefore, this study is the first to provide a compre-
hensive literature review of the major work investigating SOA determinants. Through this study,
we provide a perspective and integration of prior research on SOA determinants and heterogeneity
over the past 20 years. As such, this study provides a platform for knowledge development in the
SOA literature to uncover areas in which more research is needed.
Capital structure is a key determinant of a firm’s overall financial risk, cost of capital and conse-
quently firm value (West et al., 2021). According to Kumar et al. (2017), capital structure is impor-
tant for the development of an organization including how a firm decides its long-term investment
decisions and identifies suitable sources of finance. Since being either under-leveraged or over-
leveraged is likely to impair firm value, firm stakeholders should be interested in the factors deter-
mining SOA as this has potential implications for the value of their underlying claims. Prior studies
have identified a number of factors that have a significant impact on SOA heterogeneity (Dang
et al., 2019; Huang et al., 2021b; Zhou et al., 2016). These factors are categorized into six groups,
namely, (1) fundamental and operational characteristics, (2) financial reporting and managerial
incentives, (3) corporate governance and monitoring structures, (4) informal institutions, (5) finan-
cial market attributes and (6) economy-wide attributes. Before reviewing this strand of the literature,
we begin our review by discussing the theoretical framework and models used to measure SOA in
the extant literature. Under this framework, SOA heterogeneity is primarily explained based on the
static and dynamic trade-off theories, which are consistent with the presence of an ‘optimal’ or target
capital structure that firms are adjusting towards. The pecking order theory and the market timing
theory have less commonly been proposed as frameworks for explaining SOA heterogeneity. To
estimate the SOA, empirical studies have typically employed partial adjustment models in which a
bounded leverage ratio is the dependent variable. These models allow for imperfect and potentially
infrequent leverage adjustments over time. Based on research gaps identified in the SOA literature,
we then suggest some directions for future research in this area.
Empirical studies on SOA determinants are mainly sourced from the Web of Science database.
The literature search involves using the keywords ‘adjustment speed’ and ‘capital structure dynam-
ics’ with the time filter being from 2001 to 2021. Based on the reading of article abstracts, if deter-
minants of SOA heterogeneity are highlighted as the focus of an empirical study, it is included in
our literature survey. Finally, our survey consists of 64 such empirical studies published1 in
450 Australian Journal of Management 49(3)

Table 1. List of journals in the survey. This table summarizes where empirical articles in the survey have
been published.

Journal No. of publications

Finance journals
Australian Journal of Management 2
Emerging Markets Review 1
European Financial Management 1
Finance Research Letters 2
Financial Management 4
Global Finance Journal 2
International Journal of Managerial Finance 1
International Review of Economics and Finance 2
International Review of Finance 1
International Review of Financial Analysis 1
Journal of Banking and Finance 2
Journal of Corporate Finance 6
Journal of Empirical Finance 1
Journal of Financial and Quantitative Analysis 3
Journal of Financial Economics 4
Journal of Financial Intermediation 1
Journal of International Financial Markets, Institutions & Money 1
Pacific-Basin Finance Journal 1
Review of Finance 1
The European Journal of Finance 1
The Financial Review 1
The Journal of Finance 2
The Journal of Financial Research 2
The Review of Financial Studies 1
Economics journals
Applied Economics 3
Economic Modelling 3
Economics Letters 1
Economics of Transition 1
Empirical Economics 1
European Review of Agricultural Economics 1
Accounting and Management journals
Accounting and Finance 6
Journal of Accounting, Auditing and Finance 1
Journal of Business Finance and Accounting 2
Small Business Economics 1

journals ranked A* and A as per the Australian Business Deans Council (ABDC) 2019 Journal
Quality list. Table 1 summarizes the publishing outlets of the articles in our survey. Given the
nature of managerial SOA-related decision-making, most of the surveyed articles have been pub-
lished in Finance journals (44 studies), followed by Economics journals (10 studies). The remain-
ing articles appear in Accounting and Management journals (10 studies). In Table 2, the content of
these articles is summarized across different categories, namely, author name, publication year,
sample size, sample period, sample context and findings.
Table 2. Overview of empirical studies on the SOA determinants.

Authors Publication Sample Sample Sample context Findings

Nguyen et al.

year size period

Firm-specific characteristics
Aderajew, Trujillo- 2019 15,682 2001–2015 The Netherlands The SOA is slow and varies according to size and farm type. More
Barrera and specifically, the SOA is relatively faster for horticulture farms and
Penning slower for livestock farms
Aybar-Arias, 2012 9114 1995–2005 Spain The rate of financial flexibility, growth opportunities and size are
Casino-Martınez positively related to the SOA, whereas the distance to the optimal
and Lopez-Gracia ratio of debt shows a negative impact on the SOA
Byoun 2008 118,731 1971–2003 United States The SOA is faster when firms face financial surpluses with above-
target leverage ratios or financial deficits with below-target leverage
ratios
Dang and Garrett 2015 112,605 1971–2003 United States Firms adjust towards their target leverage faster when they are over-
levered with a financing deficit
Dang, Kim and Shin 2012 5393 1996–2003 United Kingdom Firms with large financing imbalances, large capital expenditures or
low earnings volatility have a significantly faster SOA than those with
the opposite characteristics. In addition, firms reverting quickly to
their target leverage are over-levered with a financing deficit and rely
heavily on equity issues to make such adjustment
Elsas and Florysiak 2011 169,787 1965–2009 United States The SOA is higher for firms with high financing deficits and smaller
firms due to opportunity costs of deviating from a target are high,
or when deviations from target leverage are high, or for firms in
financial distress. In addition, in most conditional analyses, highly
over-levered and highly under-levered firms tend to adjust the
fastest, but in similar SOA magnitudes
Elsas, Flannery and 2014 61,175 1989–2006 United States Firms making large investments converge rapidly back to the optimal
Garfinkel capital structure
Fama and French 2002 1965–1999 United States The SOA is 7%–10% per year for dividend payers and 15%–18% per
year for nonpayers
(Continued)
451
 452

Table 2. (Continued)
Authors Publication Sample Sample Sample context Findings
year size period
Faulkender, 2012 131,062 1965–2006 United States Firms with high absolute cash flows and high absolute leverage
Flannery, Hankins deviations make larger capital structure adjustments than firms with
and Smith similar leverage deviations but cash flow realizations near zero.
When cash flow overlaps the leverage deviation, an unconstrained
over-levered firm adjusts more slowly than does a similar-sized,
unconstrained under-levered firm. Under-levered firms move less
quickly towards higher target leverage levels when interest rates are
high. Conversely, over-levered firms appear to increase their SOA
significantly due to higher equity valuations
Fitzgerald and Ryan 2019 15,669 1996–2015 United Kingdom Openly held firms adjust back to the target leverage faster than
closely held firms. In addition, small, high growth and low dividend
paying firms adjust back to the target leverage faster than their large,
low growth and high dividend paying counterparts
González and 2011 16,284 1995–2003 Spain The rate of financial flexibility, growth opportunities and size are
González positively related to the SOA, whereas the distance to the optimal
ratio of debt has a negative impact on the SOA
Leary and Roberts 2005 127,308 1984–2001 United States Firms will raise (reduce) debt when their leverage is relatively low
(high). The SOA is heterogeneous across several leverage levels
Mukherjee and 2013 115,299 1965–2008 United States The SOA is positively related to the distance from the target
Wang leverage. In addition, the positive relation is greater for over-levered
than under-levered firms
Nguyen, Bai, Hou 2021a 206,046 1970–2017 United States When total leverage and long-term leverage are considered, low-
and Truong and high-levered firms are associated with a higher degree of the
SOA than are mid-levered firms. Furthermore, there is a difference
in the SOA between low- and high-levered firms, which points to the
SOA skewness. However, when short-term leverage is considered
in the analysis, the SOA becomes smaller at varying levels of short-
term debt
(Continued)
Australian Journal of Management 49(3)
Table 2. (Continued)
Authors Publication Sample Sample Sample context Findings
year size period
Nguyen et al.

Smith, Chen and 2015 2171 1984–2009 New Zealand The greater the financial surpluses and the more their leverage
Anderson ratio exceeds the target, the more likely firms are to adjust their
target leverage ratios downwards. Furthermore, firms operating in
highly concentrated, highly munificent or highly dynamic industries,
and whose debt is well above target, are more likely to adjust their
target leverage downwards. Firms in less concentrated or less
dynamic industries, with debt well above target, are also more likely
to reduce the proportion of debt in their capital structures
Zhang, Zhao and 2020 13,702 2004–2016 China Firms with larger absolute cash flow adjust towards their leverage
Jian targets significantly faster than those with smaller absolute cash flow
Zhou, Tan, Faff and 2016 12,147 1975–2012 United States Firms with costs of equity that are more sensitive to the leverage
Zhu deviation adjust towards the optimal capital structure faster
Financial reporting and managerial incentives
Brisker and Wang 2017 10,015 2007–2013 United States A higher CEO inside debt ratio is associated with faster (slower)
leverage adjustments towards the shareholders’ desired level for
over-levered (under-levered) firms
Lartey, Kesse and 2020 8474 2000–2015 United States Firms managed by extraverted CEOs adjust towards the target
Danso leverage faster. The positive relation between extraversion
and the SOA is enhanced for firms that are larger, have greater
collateralizable assets and are more vulnerable to external shocks
Ramalingegowda 2018 40,571 1972–2011 United States Firms with more conservative financial reporting adjust their capital
and Yu structure towards the target more quickly. The positive impact
of accounting conservatism on the SOA is concentrated in under-
levered firms, which occurs through conservatism facilitating debt
issuance
Corporate governance
An, Chen, Li and 2021 79,702 2000–2013 International Foreign institutional ownership is positively related to the SOA. This
Yin positive relation is concentrated for over-leveraged firms that need
to decrease financial leverage to adjust towards the target
(Continued)
453
Table 2. (Continued)
454

Authors Publication Sample Sample Sample context Findings

year size period
Chang, Chou and 2014 4297 1993–2009 United States Both over-levered and under-levered firms with weak governance
Huang adjust slowly towards their target debt levels, though with different
motivations. In particular, under-levered weak governance firms tend
to adjust slowly towards the optimal capital structure because the
costs of the disciplinary role of debt outweigh the benefits of using
debt as a takeover defence tool. Over-levered weak governance
firms also have a slow SOA because they are reluctant to decrease
their leverage towards the target level to deter potential raiders,
especially if they face a serious takeover threat
Chang, Chen, Chou 2015 5012 1992–2009 United States The difference in the SOA between firms with weak and strong
and Huang governance structures is smaller among firms operating in the highly
competitive industries
Dang, Dang, 2020 33,619 2000–2010 International Greater news coverage and more positive news sentiment are
Moshirian, Nguyen associated with faster SOA
and Zhang
Do, Lai and Tran 2020 14,136 1997–2016 Taiwan Foreign investors serve as a direct substitute for debt by enhancing
corporate governance. Foreign investors help reduce leverage
adjustment costs, which in turn increases the SOA
He and Kyaw 2019 7133 2003–2011 China The SOA increases across all firms after the SSSR
Liao, Mukherjee 2015 10,054 1996–2008 United States A faster SOA is associated with better corporate governance quality
and Wang defined by a more independent board featuring CEO–chairman
separation and greater presence of outside directors, coupled with
larger institutional shareholding. In contrast, managerial incentive-
based compensation discourages adjustments towards the target
leverage. The impact of corporate governance on the SOA is most
pronounced when initial leverage is between the manager’s and the
shareholders’ desired levels
Nguyen, Bai, Hou 2021a 5374 2000–2016 Vietnam Board size, board independence, gender diversity and managerial
and Vu ownership significantly increase the SOA, whereas CEO duality
significantly decreases the SOA

(Continued)
Australian Journal of Management 49(3)
Table 2. (Continued)
Authors Publication Sample Sample Sample context Findings
year size period
Nguyen et al.

Pindado, Requejo 2015 5486 1996–2006 Eurozone Family firms are able to rebalance their capital structure faster.
and Torre Family firms’ higher SOA is mainly driven by companies in which the
family participates in management and by family businesses that are
still in the first generation
Informal institutions
Alnori and 2019 1012 2005–2016 Saudi Arabia Sharia-compliant firms have significantly slower SOAs
Alqahtani
Huang, Lu and Faff 2020 352,318 1996–2016 International Social trust has a positive effect on the SOA. Furthermore, the
positive effect of social trust on the SOA is more pronounced for
over-levered firms, firms with higher information asymmetry, firms
with lower ease of financing and firms located in countries with
weaker governance quality
Li, Jiang and Mai 2019 14,738 2007–2016 China Firms in the central position of the director network have a faster
SOA. This effect is mainly significant for non-state-owned enterprises
Li, Wu, Xu and 2017 12,728 2004–2012 China When a firm’s leverage is below the optimal level, firms with bank
Tang connections adjust their leverage by 13% annually towards the
target, compared with 9.2% for firms without bank connections.
Furthermore, bank connections are more important for young
firms, firms with low levels of collateral, firms in areas with relatively
under-developed financial markets, during periods of tight monetary
policy and when there is little competition in the banking industry
Financial market attributes
Abdeljawad and 2017 7978 1992–2009 Malaysia Malaysian firms adjust their leverage at a slow speed of 12.7%
Nor annually and this rate increased to 14.2% when the timing variable is
accounted for
An, Li and Yu 2015 120,764 1989–2013 International Firms with a higher crash-risk exposure tend to adjust more slowly
towards the target leverage. The negative relation between crash-
risk exposure and the SOA is less pronounced in countries with a
more transparent information environment

(Continued)
455
Table 2. (Continued)
456

Authors Publication Sample Sample Sample context Findings

year size period
Dang, Kim and Shin 2014 51,894 2002–2012 United States The global financial crisis has a negative impact on the SOA. The
SOA heterogeneity is more pronounced pre-crisis. Over the
pre-crisis period, more constrained firms, such as those with
high growth, with large investment, of small size and with volatile
earnings, adjust their capital structures more quickly than their less
constrained counterparts
DeAngelo, 2011 53,677 1988–2001 United States Firms prefer to operate under-levered to preserve debt capacity
DeAngelo and to fund the uncertain arrival of investment opportunities, at which
Whited point they might use ‘transitory’ debt to fund investment shocks and
rebalance to the target leverage in future years
Devos, Rahman 2017 75,221 1982–2011 United States Covenants lower the SOA by 10%–13%, relative to the SOA of firms
and Tsang without covenants. The SOA is significantly lower, by 40%–50%,
for firms with the most intense covenant provisions. In addition,
capital covenants, as opposed to performance covenants, appear
to be the main mechanism that lowers SOA, delaying the SOA by
86%. The SOA is reduced more for strict capital covenants than for
strict performance covenants. The negative relationship between
covenants and the SOA is more pronounced for firms that are over-
levered and financially constrained
Ho, Lu and Bai 2020 763,131 1996–2016 International High-liquidity firms have a significantly faster SOA than less-liquid
firms. In addition, the positive effect of liquidity on the SOA exists
only for over-levered firms and is less pronounced for firms in strong
institutional environments
Huang and Shen 2015 2410 1994–2008 International Firms adjust their capital structure towards the optimal level faster
in countries with better financial development and strong legal and
institutional environments than in weak ones, regardless of the
upgraded and downgraded rating changes
Im 2019 24,827 1988–2014 United States Over-levered firms’ SOA and peer firm shocks have a U-shaped
relationship, while under-levered firms’ SOA monotonically increases
with peer firm shocks

(Continued)
Australian Journal of Management 49(3)
Table 2. (Continued)
Authors Publication Sample Sample Sample context Findings
year size period
Nguyen et al.

Jiang, Jiang, Huang, 2017 12,463 1998–2009 China Under-levered firms adjust back to the target leverage faster when
Kim and Nofsinger bank competition is high. Small firms and non-state-owned firms
exhibit a faster SOA when bank competition is high
Khoo, Durand and 2017 936 1990–2013 Australia Acquirers, regardless of the way in which they finance the
Rath acquisitions, actively rebalance their leverage by incorporating 22%
to 62% of the leverage deviation in the acquisition year. In addition,
acquirers tend to adjust more quickly towards their target leverages
when they are either over-levered or under-levered, as well as if
they have lower profitability or higher cash levels
Kisgen 2009 7487 1987–2003 United States Firms adjust their capital structure towards the target faster after
being downgraded, whereas rating upgrades have no association with
the SOA
Liu, Chiang and 2020 13,329 2001–2013 China After the rollover restrictions, the SOA slows down
Tsai
Lockhart 2014 2197 1996–2006 United States Existence of a credit line is associated with cross-sectional variations
in the estimated SOA. Specifically, among under-levered firms likely
needing external funds for either investment or liquidity, those with
a credit line in place have estimates of SOA 63% to 106% greater
than the SOA for firms without a credit line
Nieto and 2015 467 2002–2009 United States The SOA is positively and significantly related to the stock-bond
Rodriguez correlation
Rahman 2020 96,639 1970–1999 United States Interstate and intrastate banking deregulation are positively
associated with the SOA. Specifically, the SOA is faster in post-
deregulation periods. The positive effect is stronger for firms that
are financially constrained, are financially dependent on banks and
have less access to the public debt market and by deregulated banks’
ability to geographically diversify the credit risk
Shikimi 2020 68,650 1983–2014 Japan Financially constrained firms adjust their capital structure towards
the target slower during credit-crunch periods than during other
periods. During credit-crunch periods following the banking crisis,
firms associated with failing banks or with banks that have a limited
capacity to supply loans show a slower SOA than other firms
457

(Continued)
 458

Table 2. (Continued)

Authors Publication Sample Sample Sample context Findings

year size period
Tekin 2020 9731 2007–2009 United Kingdom Firms in the more unregulated Alternative Investment Market have a
faster SOA than firms in the highly regulated Main Market in United
Kingdom before the global financial crisis
Uysal 2011 52,642 1990–2007 United States Managers take deviations from their target capital structures
into account when planning and structuring acquisitions. A higher
likelihood of forgoing valuable acquisition opportunities could
generate quicker leverage adjustments for over-levered firms
Warr, Elliott, 2012 46,666 1971–2005 United States Over-levered firms adjust more rapidly towards their target when
Koëter-Kant and their equity is overvalued. However, when a firm is undervalued and
Öztekin needs to reduce leverage, the SOA is much slower
Wojewodzki, 2020 4024 1998–2013 International Credit ratings have relatively little economic effect on the speed at
Boateng and which banks’ capital structure is adjusted towards the optimal level
Brahma
Wojewodzki, Poon 2018 17,102 1991–2010 International Firms with poorer credit ratings converge back to the target
and Shen leverage significantly faster than firms with better credit ratings
Economy-wide attributes
Ahsan and Qureshi 2017 13,375 1972–2010 Pakistan The SOA towards the short-term target capital structure is slower
during the post-financial liberalization period as compared to the
pre-financial liberalization period
Antoniou, Guney 2008 57,134 1987–2000 International The SOA crucially depends on the financial system and corporate
and Paudya governance traditions of each country
Baum, Caglayan 2017 10,943 1981–2009 United Kingdom Over-levered firms converge back to the optimal capital structure
and Rashid more rapidly when macroeconomic risk is low. In contrast, under-
levered firms adjust quickly towards the target leverage in times of
low firm-specific risk and high macroeconomic risk

(Continued)
Australian Journal of Management 49(3)
Table 2. (Continued)
Authors Publication Sample Sample Sample context Findings
Nguyen et al.

year size period

Cook and Tang 2010 124,466 1977–2006 United States Firms tend to adjust faster towards the target leverage in good
macroeconomic states relating to firms’ favourable access to capital
markets, as defined by term spread, default spread, GDP growth
rate and dividend yield. After splitting the full sample into financially
unconstrained and constrained firms and re-estimating the SOA for
each category across states, the results still exhibit a faster SOA in
good states compared to bad states, regardless of firms’ access to
external capital markets
Drobetz, Schilling 2015 115,537 1992–2011 International Firms in market-based countries rebalance faster after leverage
and Schröder shocks than firms in bank-based countries. In addition, firms adjust
towards the target leverage more slowly during bad macroeconomic
states and the business cycle effect is more pronounced for
financially constrained firms in market-based countries
Haas and Peeters 2006 67,125 1993–2001 Central and The gradual development of the financial systems enables firms to
Eastern Europe bring their actual capital structure closer to the target
Jonghe and Öztekin 2015 154,065 1994–2010 International Banks have a faster SOA in countries with more developed capital
markets, more stringent capital requirements, better supervisory
monitoring and higher inflation. In times of crises, banks adjust their
capital structure more quickly
Mai, Meng and Ye 2017 11,209 2000–2014 China In the process of economic recovery, there was apparent regional
variation in the SOA. More specifically, the fastest adjustment in
capital structure is in East China while that of West China followed
and that of Mid China, the slowest
Öztekin and 2012 105,568 1991–2006 International Firms from countries with better functioning financial systems, a
Flannery financial structure based on the effectiveness of capital markets
instead of intermediaries and strong legal institutions adjust towards
their target leverage as much as 50% more rapidly

SOA: speed of adjustment; CEO: chief executive officer; SSSR: split share structure reform; GDP: gross domestic product.
459
460 Australian Journal of Management 49(3)

Our review contributes to the existing body of the literature in the following ways. In particular,
this study is the first that provides an overview and synthesis of the research on SOA determinants
over the past 20 years. We initially provide the theoretical framework explaining how fast firms
adjust their capital structure towards the optimal level. Then, we identify weaknesses of current
empirical studies and provide potential future research opportunities to extend the current under-
standing about SOA determinants. Thus, findings from this review may provide an impetus to
promote explorations in the SOA research area and help researchers to direct their efforts in unex-
ploited areas of SOA and related literature.
The remainder of the article is organized as follows. The next section presents a theoretical
overview along with outlining of the models used to estimate SOA. The third section reviews the
literature on SOA causal factors. The fourth section provides suggestions for future research com-
ing out of the literature review analysis. The last section concludes the article.

2. Theoretical overview and models

2.1. Theoretical overview
Since the seminal work by Modigliani and Miller (1958), the extensive literature on the capital
structure area largely focuses on testing the static and dynamic trade-off theories (Dang et al.,
2019). The static trade-off theory suggests the existence of an optimal capital structure that maxi-
mizes firm value, balancing tax benefits of debt financing against costs of financial distress result-
ing from a high debt level (Ahmad and Etudaiye-Muhtar, 2017; Jensen and Meckling, 1976).
However, shocks to cash flows and stock prices frequently cause firms to deviate from their target
leverage level (Chang et al., 2014; Ramalingegowda and Yu, 2018). Since being either under-lev-
eraged or over-leveraged is inconsistent with firm value maximization, firms have incentives to
move back to the target leverage level using transactions to raise or reduce capital sources (Cook
and Tang, 2010; Dang et al., 2019).
Prior studies generally find unexpectedly low SOAs (Fama and French, 2002; Ramalingegowda
and Yu, 2018) as leverage adjustments are not costless in a dynamic setting (Devos et al., 2017).
Accordingly, the subsequent dynamic trade-off theory suggests the presence of a trade-off between
costs as a result of deviation from the optimal leverage ratio and adjustment costs (An et al., 2015;
Dang et al., 2019). Most empirical studies attribute incomplete capital structure rebalancing to
leverage adjustment costs, namely, transaction costs or new security issuance and repurchase costs,
which are related to information asymmetry and agency problems between managers and outside
investors (An et al., 2015; Flannery and Rangan, 2006; Öztekin and Flannery, 2012).
However, no single theory can fully explain capital structure choices adopted by corporate enti-
ties (Byoun, 2008; Huang and Ritter, 2009). Although neither the pecking order theory nor the
market timing theory predict the existence of target leverage ratios and adjustment towards these
targets, these theories may be relevant in explaining managerial SOA decision-making (Byoun,
2008). Under the pecking order theory, adverse selection costs of issuing risky securities, because
of information asymmetry or managerial optimism, lead to a preference for internal funds over
costly external financing (Byoun, 2008; Myers and Majluf, 1984; Öztekin, 2015). Prior studies
(Byoun, 2008; Leary and Roberts, 2005) argue that firms may have optimal leverage levels and
simultaneously prefer internal funds in the presence of significant adverse selection or transaction
costs. Accordingly, adjustments back to target leverage ratios likely occur when firms face cash
flow imbalances (surpluses or deficits) depending on whether leverage ratios are above or below
targets (Byoun, 2008; Devos et al., 2017).
Nguyen et al. 461

Meanwhile, the market timing theory posits that firms consider the time-varying relative costs
of issuing securities when making capital structure decisions (Baker and Wurgler, 2002; Dang
et al., 2014; Öztekin, 2015). Accordingly, firms will alter their leverage position to exploit favour-
able pricing opportunities (Öztekin, 2015). Previous studies (Devos et al., 2017; Flannery and
Rangan, 2006; Warr et al., 2012) suggest that different market timing can affect leverage adjust-
ment costs. Thus, over- or under-valuation of firm equity will lead to differences in SOA (Flannery
and Rangan, 2006; Frank and Goyal, 2004; Warr et al., 2012). Specifically, firms with over-valued
(under-valued) equity are more likely to issue equity (debt) instead of debt (equity), thereby pre-
venting (expediating) firms moving back to the optimal leverage level when they have below-tar-
get leverage ratios.

2.2. Models
2.2.1. Standard partial adjustment model. Due to the presence of leverage adjustment costs, firms
may not fully adjust their capital structure towards the target (An et al., 2015; Öztekin and Flan-
nery, 2012). Therefore, most previous studies estimate the SOA using the standard partial adjust-
ment model as follows

 Li ,t  Li ,t 1    0    L*i ,t  Li ,t 1    i ,t (1)

where λ is the magnitude of the SOA; Li ,t , Li ,t −1 are actual leverage ratios of firm i in year t and
t–1, respectively; L*i ,t is the target leverage ratio for firm i in year t; and ε i ,t is the error term.
The target leverage ratio L*i ,t in equation (1) is not directly observed. It is typically estimated as
a function of several factors as shown below

L*i , t   F X i , t 1   M Firm   N Year (2)

where X i ,t −1 is a vector of firm characteristics for firm i in year t–1. Firm is a vector of indicator
variables capturing firm fixed effects. Year is a vector of indicator variables capturing annual fixed
effects.
Substituting the target leverage ratio L*i ,t of equation (2) into equation (1) yields the following
dynamic panel model

Li , t   0  1    Li , t 1   F   X i , t 1   M   Firm   N   Year   i , t (3)

Then, determinants of SOA are incorporated into equation (3) as shown below

Li , t   0  1    Li , t 1   F   X i , t 1   M   Firm   N   Year    K   Z i , t 1   i , t (4)

where Z i ,t −1 is the vector of SOA determinants. According to Flannery and Hankins (2013), ordi-
nary least squares (OLS) estimates of the lagged dependent variable’s coefficient in a dynamic
panel model are biased due to correlation with fixed effects. To correct estimation biases in the
dynamic panel model, most previous studies apply the generalized method of moments (GMM)
approach proposed by Blundell and Bond (1998) for the estimation of equation (4).

2.2.2. Modified partial adjustment model. Equation (4) assumes that all firms adjust their capital
structure towards the optimal level at the same rate (λ) in all time periods. Recent studies have
examined cross-section variations in SOA by employing the modified partial adjustment model
462 Australian Journal of Management 49(3)

because it is flexible and allows SOA to depend on the firm’s specific conditions (An et al., 2015;
Dang et al., 2019; Öztekin and Flannery, 2012). Rather than estimating the target leverage ratio
L*i ,t through a static model in equation (2), these studies estimate the dynamic panel model as
follows

Li , t   0  1    Li , t 1   F   X i , t 1   M   Firm   N   Year   i , t (5)

The estimation of the model in equation (5) will provide an initial set of estimated λ, α F , α M and
α N , which are used to calculate the target leverage ratio L*i ,t in equation (2). Then, a model is
developed by regressing the SOA parameter against a variety of attributes that are hypothesized to
be related to SOA as follows

i , t   K Z i , t 1 (6)

Substituting equation (6) into equation (1) yields the modified partial adjustment model as shown
below

 Li ,t  Li ,t 1    0   K Z i ,t 1   L*i ,t  Li ,t 1    i ,t (7)

3. Determinants of the leverage adjustment speed

3.1. Fundamental and operational characteristics
Due to differences in leverage adjustment costs and benefits, SOA is heterogeneous across firms
(Dang et al., 2012; Elsas and Florysiak, 2011; Zhou et al., 2016). Previous studies typically condi-
tion the SOA on a set of firm characteristics (Elsas and Florysiak, 2011; Fitzgerald and Ryan,
2019). Importantly, most selected firm-specific characteristics reflect fundamental or operational
determinants of a firm’s capital structure itself, because it is logical that factors determining target
leverage of a firm also determine the economic pressure to stay close to this target (Elsas and
Florysiak, 2011).
Elsas and Florysiak (2011) conduct an extensive analysis to explore cross-sectional heterogene-
ity in SOA employing a set of firm fundamental characteristics for listed US firms. They provide
evidence for pronounced heterogeneity, where SOA is faster for firms with high financing deficits,
for smaller firms due to higher opportunity costs of deviating from target, when deviations from
target leverage are large and for firms in financial distress. In contrast, González and González
(2011) observe no differences in SOA between small and large Spanish firms. However, as per the
study by Aybar-Arias et al. (2012), the degree of financial flexibility, growth opportunities and firm
size are positively related to SOA, whereas the distance to the optimal debt ratio has a negative
impact on SOA. Recently, Aderajew et al. (2019) examined 1500 Dutch farms (as distinct from
standard firms) and found that SOA is slow and varies according to farm size and type. More spe-
cifically, SOA is relatively faster for horticulture farms and slower for livestock farms.
By developing a dynamic panel threshold model of capital structure, Dang et al. (2012) show
that UK firms with large financing imbalances, large capital expenditures or low earnings volatility
have a significantly faster SOA than those with the opposite characteristics. Fitzgerald and Ryan
(2019) found that openly held firms adjust back to the target leverage level faster than closely held
firms. Their results further suggest that smaller, higher growth and low dividend-paying firms
adjust towards the target level faster than their larger, lower growth and high dividend-paying
counterparts. Similar results are observed in the study by Fama and French (2002), who confirm
Nguyen et al. 463

that dividend payers have a slower SOA than non-payers. Specifically, they suggest that SOA is
7%–10% per year for dividend payers and 15%–18% per year for non-payers.
Differing with studies discussed above, Mukherjee and Wang (2013) focus on the leverage
adjustment benefits and postulate that SOA is positively associated with the starting leverage devi-
ation. The marginal tax shield is a decreasing function, while the marginal bankruptcy cost is an
increasing function, of a firm’s leverage ratio. The net benefit of rebalancing expands at an increas-
ing rate as the firm’s leverage moves farther away from the target. Consequently, the greater the
distance from the target leverage ratio, the bigger the incentive to adjust and the faster the SOA.
They indicate that SOA is positively related to the deviation from the target leverage level and the
SOA sensitivity to leverage deviation depends on whether the current capital structure is below or
above the target.
SOA asymmetry is also determined by the firm’s cash flow situation (Byoun, 2008; Faulkender
et al., 2012; Zhang et al., 2020a). Particularly, Byoun (2008) expresses a need to incorporate the
pecking order and trade-off behaviours in examining capital structure decision-making. Due to the
preference for internal funds, adjustments back to target leverage likely occur when firms face
imbalances in cash flows. Byoun (2008) documents that SOA is faster when firms face financial
surpluses with above-target leverage ratios or financial deficits with below-target leverage ratios.
However, the Byoun (2008) findings depend on an implicit assumption that firms adjust towards
the target leverage by making changes in debt ratios. Dang and Garrett (2015) provide new insights
into leverage adjustment mechanisms by analytically deriving the difference in SOA when lever-
age adjustments are restricted to changes in debt, and when they include changes in debt, equity
and total assets. Their results indicate that the two approaches only deliver the same SOA under
restrictive scenarios and over-levered firms with a financing deficit adjust towards their target
leverage faster. Smith et al. (2015) extend Byoun’s (2008) model about the effect of financial defi-
cits and surpluses on SOA to demonstrate how industry characteristics identified by Kayo and
Kimura (2011), including industry concentration, industry munificence and industry dynamism,
affect SOA heterogeneity. They find that New Zealand firms operating in less concentrated, highly
munificent or highly dynamic industries and whose debt is well above target, adjust towards their
target leverage faster.
Faulkender et al. (2012) recognize that cash flow realizations can provide opportunities for
firms to adjust leverage at relatively low marginal cost, regardless of whether their transaction
costs are high or low. As such, they show that firms with high absolute cash flows and high abso-
lute leverage deviations make larger capital structure adjustments than firms with similar leverage
deviations but cash flow realizations near zero. They also provide results about the impact of mar-
ket conditions on SOA with under-levered firms moving less quickly towards higher target lever-
age levels when interest rates are high. Conversely, over-levered firms appear to increase their
SOA significantly in the presence of higher equity valuations. Recently, Zhang et al. (2020a) dem-
onstrated similar findings that Chinese firms with a larger absolute cash flow adjust towards their
leverage targets significantly faster than those with a smaller absolute cash flow.
In a notable study, Zhou et al. (2016) exploit the leverage deviation to investigate capital struc-
ture dynamics from the perspective of the ex-ante cost of equity capital. They document that firms
with costs of equity that are more sensitive to leverage deviation adjust towards the optimal capital
structure faster. Rather than estimating SOA heterogeneity across firms, Elsas et al. (2014) exam-
ine whether managerial SOA decision-making is associated with major investments accompanied
by external financing. They find that security types issued to finance a large investment signifi-
cantly depend on the distance from the target leverage. Over-leveraged firms issue less debt and
more equity when financing large projects, and vice versa. As such, they provide evidence that
firms making large investments converge rapidly back to the optimal capital structure.
464 Australian Journal of Management 49(3)

Previous studies (Leary and Roberts, 2005; Nguyen et al., 2021a) also document SOA hetero-
geneity across leverage levels. In particular, Leary and Roberts (2005) employ simulations that
allow the dynamic capital structure to exhibit three scenarios of adjustment costs: fixed cost, pro-
portional cost and fixed cost together with a weakly convex component. Through examining each
scenario, they find that firms will raise (reduce) debt when their leverage is relatively low (high).
Although Leary and Roberts (2005) document SOA heterogeneity across several leverage levels,
the discrete segmentations used in their study uncover limited results. More importantly, the study
does not test for SOA asymmetry corresponding to low- and high-levered firms.
Instead of focusing on a range for the target leverage, Nguyen et al. (2021a) analyse actual lev-
erage to reveal a smooth pattern of SOA from low-levered firms to high-levered firms. They show
that when total leverage and long-term leverage are considered, low- and high-levered firms are
associated with a higher degree of SOA than are medium-levered firms. Furthermore, there is a
difference in SOA between low- and high-levered firms, which points to SOA skewness. However,
when short-term leverage is considered in the analysis, SOA becomes smaller at varying levels of
short-term debt.
Although the literature on fundamental and operational factors driving SOA is extensive, previ-
ous studies often provide mixed results. Given the mixed conclusions in the literature, we call for
more research to better understand how these characteristics affect SOA. In addition, it is surpris-
ing that research questions in most surveyed studies are pursued in only one country. While single
market studies reduce econometric and estimation concerns related to correlation, endogeneity and
sample selection bias, the use of a specific country context also comes with costs. For example, one
cost is the limited generalizability of findings in these studies. Therefore, future research might
examine interesting comparisons and cross-country predictions2 with relatively similar institu-
tional settings, such as region or trade-bloc level settings.

3.2. Financial reporting and managerial incentives

The main objective of financial reports is to ‘provide financial information3 about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making deci-
sions about providing resources to the entity’ (FASB, 2010). Therefore, it is logical that properties
of the financial reporting system may affect firm capital structure decisions. Recently,
Ramalingegowda and Yu (2018) employed accounting conservatism as an attribute of the financial
reporting system to examine its impact on managerial SOA decision-making and documented that
firms with more conservative financial reporting adjust their capital structure towards the target
more quickly. The positive impact of accounting conservatism on SOA is concentrated in under-
levered firms, which occurs through conservatism facilitating debt issuance.
Another important dimension of financial reporting is its readability. Despite its paramount
importance, information in financial statements is plagued with readability concerns (Habib et al.,
2018). As managers can obfuscate the quality of financial reports by making it harder for outside
investors to understand and infer the future cash flow implications of current accounting informa-
tion (Biddle et al., 2009), the lack of annual report readability reduces financial reporting quality
(Lo et al., 2017), thereby increasing external financing costs (Rjiba et al., 2021). As such, finan-
cial report readability potentially plays a significant role in reducing leverage adjustment costs
associated with information asymmetry and financing frictions. Thus, an avenue for future
research would be to investigate whether the readability of financial reports is associated with
SOA outcomes.
According to Hail et al. (2010), a key driver of financial reporting quality is managerial report-
ing incentives, which are influenced by several factors such as firm characteristics, corporate
Nguyen et al. 465

governance structure, managerial incentive-based compensation, product market competition, the

strength of the enforcement regime and a country’s legal institutions. Brisker and Wang (2017)
investigate the impact of one form of managerial incentive-based compensation, chief executive
officer (CEO) inside debt, on SOA. Offering managers debt-based compensation exacerbates man-
agerial risk-averse behaviours (Brisker and Wang, 2017). Liao et al. (2015) suggest that exces-
sively risk-averse managers tend to avoid lifting the debt ratio to the level that shareholders desire.
Consistent with these arguments, Brisker and Wang (2017) provide empirical evidence that a
higher CEO inside debt ratio is associated with faster (slower) leverage adjustments towards the
shareholders’ desired level for over-levered (under-levered) firms.
In contrast, offering managers equity-type compensation encourages risk taking and mitigates
managerial conservatism (Brisker and Wang, 2017). After several high-profile accounting scandals
in the early 2000s, a particular concern of regulators and investors is that stock-based compensa-
tion might induce managers to increase the short-term stock price through earnings management
(Cheng and Warfield, 2005). An avenue for future research is to examine the association between
capital structure SOA and the nature or extent of managerial equity-based compensation. However,
if managerial incentive-based compensation discourages adjustments towards the target leverage,
will compensation committees consider the re-design of executive compensation packages?
Although this is not a simple question because reducing equity-based compensation could also
motivate managers into forgoing risky but positive net present value (NPV) projects, for instance.
Future research might consider addressing these issues.
Managerial personality traits or styles have recently been found to have significant effects on
capital structure SOA. In particular, Lartey et al. (2020) find that firms managed by extrovert CEOs
adjust towards the target leverage level faster. The positive relation between extraversion and SOA
is enhanced for firms that are larger, have greater collateralizable assets and are more vulnerable to
external shocks. As identified in prior research (Malmendier et al., 2011), CEO overconfidence and
formative early-life experiences also play an important role in explaining observed variations in
capital structure. A potential extension, therefore, is to examine the impact of such CEO character-
istics on SOA. We further encourage future studies to investigate how other CEO characteristics,
including CEO tenure, age, gender and education, also influence a firm’s SOA decision-making.
Prior studies find that the board of directors and other members of the top management team such
as CFOs also play significant roles in capital structure decision-making (Alves et al., 2015; Graham
and Harvey, 2001). Therefore, future research can consider how company directors, the chief
financial officer (CFO) and broader top management team, instead of only the CEO, also affect
SOA decisions.

3.3. Corporate governance and monitoring structures

Corporate governance is a framework to build an environment of accountability, trust and transpar-
ency (Detthamrong et al., 2017). The extant literature suggests that corporate governance is an
important tool to reduce the agency problems between managers and outside investors (Chang
et al., 2014; Detthamrong et al., 2017; Liao et al., 2015), which are associated with distortions in
corporate policy choices and lower firm performance (Morellec et al., 2012). Because debt limits
managerial flexibility (Jensen, 1986), self-interested managers may not make capital structure
decisions that maximize shareholder wealth. Morellec et al. (2012) suggest that an effective corpo-
rate governance system can discipline managers to use more debt and make more timely leverage
adjustments towards the target level.
Complementing the theoretical findings of Morellec et al. (2012) and Chang et al. (2014) provide
empirical evidence that both the disciplinary and takeover defence roles of debt provide motivations
466 Australian Journal of Management 49(3)

for managers to adjust firm leverage. They find that both over-levered and under-levered firms with
weak governance adjust slowly towards their target debt levels, though with different motivations.
Extending the study of Chang et al. (2014, 2015), show that product market competition increases the
incentives for firms with weak governance structures to maximize the wealth of shareholders, thereby
increasing SOA. The difference in SOA between firms with weak and strong governance structures
is found to be smaller among firms operating in highly competitive industries.
Liao et al. (2015) find that a faster SOA is associated with better corporate governance quality
defined by a more independent board featuring CEO–chairman separation and greater presence of
outside directors, coupled with a larger institutional shareholding influence. Conversely, manage-
rial incentive-based compensation discourages adjustment towards the target leverage level.
Nguyen et al. (2021b) argue that corporate governance in emerging markets plays a vital role in
alleviating agency problems and severe information asymmetry because legal systems, the rule of
law and investor protection mechanisms are not effective. Using data from Vietnamese stock mar-
kets, they demonstrate that board size, board independence, gender diversity and managerial own-
ership increase SOA, whereas CEO duality decreases SOA.
Some other forms of ownership are also documented to be associated with SOA heterogeneity
(An et al., 2021; Do et al., 2020; Pindado et al., 2015). Particularly, focusing on a selection of
countries that are part of the Eurozone (Austria, Belgium, Germany, Spain, Finland, France,
Ireland, Italy and Portugal), Pindado et al. (2015) find that family firms rebalance their capital
structure faster than other firms. Family firms’ faster SOA is mainly driven by companies in which
the family participates in management and by family businesses that are still in the first generation.
Do et al. (2020) reveal that foreign investors in Taiwanese firms serve as a direct substitute for debt
by enhancing corporate governance. As such, foreign investors help reduce leverage adjustment
costs, which in turn increases SOA. Employing a large sample of 7246 firms across 38 countries
from 2000 to 2013, An et al. (2021) provide similar evidence that foreign institutional ownership
is positively related to firms’ SOA. This positive relation is concentrated for over-leveraged firms
that need to decrease financial leverage to converge back to the target.
At the macro-level, regulatory oversight can also be considered as an effective monitoring mech-
anism. After several failed attempts, the China Securities Regulatory Commission (CSRC) launched
the Split Share Structure Reform (SSSR) in April 2005 to enhance corporate governance by reduc-
ing agency problems between state owners and non-state shareholders via conversion of state-
owned non-tradable shares into tradable shares, making state-owned shares sensitive to the stock
market mechanism. He and Kyaw (2018) argue that this reform provides an excellent laboratory to
re-examine capital structure dynamics in China and their evidence supports that SOA increases
across all firms after the SSSR. Given that news media coverage can serve as an external corporate
governance mechanism, Dang et al. (2019) analyse global news across 33 countries and suggest that
greater news coverage and more positive news sentiment are associated with quicker SOA.
The association between corporate governance and SOA is only beginning to receive extensive
attention from academics. As discussed above, there is some evidence that the existence of stronger
governance and monitoring mechanisms is associated with an improvement in SOA decision-mak-
ing. However, there is still a need for more research in this area to address different types of gov-
ernance structures. In particular, the extant literature suggests that external auditors and financial
analysts play important roles in mitigating agency costs arising from conflicts of interest between
shareholders and managers (Fan and Wong, 2005; Habib et al., 2018; Kim et al., 2015). In addition,
Yuan et al. (2016) argue that director and officer liability (D&O) insurance can serve as an effective
external monitoring mechanism, which can improve corporate governance at the firm-level and
investor protection at the country-level. Thus, it would be interesting for future research to inves-
tigate whether SOA is associated with other corporate governance and monitoring mechanisms
Nguyen et al. 467

including D&O liability insurance, external auditing and analyst coverage. It may also be relevant
to consider the role of different governance systems, such as bank-based governance relationships
in countries such as Japan and Germany, on SOA compared with that for more common-law coun-
try governance structures. Due to the relatively recent implementation of new corporate govern-
ance codes in many countries, regulatory changes in the environment may provide opportunities
and natural experiment settings for future research to examine how corporate governance reforms
are associated with firm capital structure SOA decisions on a longitudinal basis.

3.4. Informal institutions

The preceding section reviewed empirical studies on the association between capital structure SOA
and formal governance and monitoring mechanisms. In this section, we survey empirical studies
investigating the impact of informal institutions on SOA. Informal institutions refer to firm-spe-
cific norms and values, management ethos, codes of conduct in business, general norms and values
in society and firm reputation from the perspective of competitors, suppliers and customers (Habib
et al., 2018). Huang et al. (2021a) recently investigated the impact of trust on SOA heterogeneity
and found that social trust has a positive effect on SOA. Furthermore, their results suggest that the
positive effect of social trust on SOA is more pronounced for over-levered firms, firms with higher
information asymmetry, firms with reduced ease of financing and firms located in countries with
weaker governance quality.
Hogg and Abrams (1988) suggest that the value in sharing an identity and having a sense of
being in a particular group has substantial influence on people’s behaviours. A growing literature
empirically examines the impact of religious beliefs, an important aspect of culture, on a wide
range of corporate decisions, namely, tax avoidance (McGuire et al., 2012), investment decisions
(Hilary and Hui, 2009) and capital structure decisions (Alalmai et al., 2020). To extend this strand
of research, future work might investigate the impact of religion on SOA decision-making. From
a conceptual perspective, both religion and trust are embedded within the broader concept of
social capital (Habib et al., 2018). These two positive attributes are in contrast to a culture of cor-
ruption, which adversely affects social capital. Thus, another avenue for future research could be
to examine whether SOA is associated with corruption, which undermines the functioning of
formal institutions.
Habib et al. (2018) argue that the role of informal institutions is of special significance in emerg-
ing economies, where formal institutions such as investor protection, accounting standards and
corporate governance are weak. Accordingly, Li et al. (2019) believe that China, a transition econ-
omy with developing legal systems and relatively weak corporate governance, provides a suitable
setting to examine whether the network of interlocked directors is associated with capital structure
SOA. For the Chinese market environment, they document that firms in the central position of the
director network have a faster SOA. Similarly, Li et al. (2017) identify that bank connections in
Chinese-listed firms established through personal networks affect SOA. Specifically, when a firm’s
leverage is below the optimal level, firms with bank connections adjust their leverage by 13%
annually towards the target, compared with 9.2% for firms without bank connections.
In another study, Alnori and Alqahtani (2019) investigate the impact of sharia compliance status
on SOA. Firms complying with sharia are subject to several restrictions stemming solely from
three sources, namely, the Qur’an, Sunnah and Ijtihad. These restrictions exist at multiple levels,
including financing, investments, transactions and risk management tools, but do not constrain
non-sharia-compliant firms. As such, sharia-compliant firms may incur greater expected bank-
ruptcy costs of debt and transaction costs. Using a sample of Saudi Arabian non-financial firms,
Alnori and Alqahtani (2019) indicate that sharia-compliant firms have significantly slower SOAs.
468 Australian Journal of Management 49(3)

Meanwhile, there is ongoing debate whether political connections are beneficial or detrimental
to shareholders’ wealth (Habib et al., 2018). In particular, Fisman (2001) provides evidence that
political connections increase firm value, among many other benefits. Conversely, politically con-
nected firms usually undertake high rent-seeking activities that are harmful to minority interests
(Faccio, 2006). Given competing views about the consequences of political connections, it would
be interesting to investigate the impact of political connections on SOA as there are potential chan-
nels such as access to debt markets, bank and other forms of finance linked to the political sphere.

3.5. Financial market attributes

Stock liquidity is considered as one of the most essential characteristics of financial market effi-
ciency (Atawnah et al., 2018; Nguyen and Muniandy, 2021). Weston et al. (2005) reveal that stock
liquidity significantly influences costs of securities issuance. Accordingly, Ho et al. (2020) find
that high-liquidity firms have a significantly faster SOA than less-liquid firms. However, the posi-
tive effect of liquidity on SOA exists only for over-levered firms and is less pronounced in strong
institutional environments. Tekin (2020) investigates how market differences affect SOA. Using a
quasi-natural experiment setting based on regulatory and institutional differences across the highly
regulated Main market (MAIN) and the comparatively unregulated Alternative Investment Market
(AIM) of the London Stock Exchange, he finds that firms listed on the AIM have a faster SOA than
firms trading on the MAIN before the global financial crisis. However, the relationship is reversed
after the global financial crisis. In a similar vein, Dang et al. (2014) demonstrate a negative impact
of the global financial crisis on capital structure SOA. Over the pre-crisis period, more constrained
firms with high growth, larger investment requirements, smaller size and volatile earnings, adjust
their capital structures more quickly than their less constrained counterparts.
Meanwhile, the market timing theory posits that managers can minimize the cost of capital by
timing the market (Baker and Wurgler, 2002). Accordingly, firms should take into account the
time-varying relative costs of issuing securities when making capital structure decisions (Dang
et al., 2014; Öztekin, 2015). Warr et al. (2012) argue that different market timing can affect lever-
age adjustment costs and over- or under-valuation of firm equity, which will lead to SOA hetero-
geneity. As expected, they find that over-levered firms adjust more rapidly towards their target
when their equity is over-valued. However, when a firm is under-valued and needs to reduce lever-
age, SOA is much slower. In addition, Abdeljawad and Nor (2017) show that when the timing vari-
able is accounted for, SOA is significantly higher and the timing role is lower for over-leveraged
firms compared with under-leveraged firms.
Another strand of research investigates how credit market conditions and supply-side factors
affect SOA. In particular, DeAngelo et al. (2011) demonstrate that firms prefer to operate under-
levered to preserve debt capacity to fund the uncertain arrival of investment opportunities, at which
point they might use ‘transitory’ debt to fund investment shocks and rebalance to the target lever-
age level in future years. As a credit line is the debt market’s solution to the borrower’s demand for
financial flexibility, Lockhart (2014) extends the study of DeAngelo et al. (2011) and investigates
the impact of credit lines on SOA. Their results suggest that the availability of credit lines is associ-
ated with cross-sectional variations in estimated SOA. Devos et al. (2017) examines the impact of
debt covenants on SOA. They provide evidence that covenants lower the SOA by 10%–13%, rela-
tive to the SOA of firms without covenants. SOA is significantly lower, by 40%–50%, for firms
with the most intense covenant provisions. However, SOA is reduced more for strict capital cove-
nants than for strict performance covenants. Nieto and Rodriguez (2015) analyse the effects of
dynamic correlations between the returns on stock and bonds issued by the same firm on SOA.
They reveal that SOA is positively and significantly related to the stock–bond correlation.
Nguyen et al. 469

In the United States, central to the credit supply chain are commercial banks, which are the larg-
est source of external financing for corporate borrowers. Using the staggered deregulation of the
US banking industry as an exogenous shock, Rahman (2020) indicates that interstate and intrastate
banking deregulation are positively associated with SOA. These positive effects are stronger for
firms that are financially constrained, are financially dependent on banks and have less access to
the public debt market and by deregulated banks’ ability to geographically diversify credit risks.
Using the boom-bust cycle from 1987 to 2014 in Japan as a bank loan supply shock, Shikimi
(2020) shows that financially constrained firms adjust their capital structure towards the target
level slower during credit-crunch periods than during other periods. Liu et al. (2020) use the
Chinese Lending Guideline 2007 as a quasi-natural experiment to study the impact of short-term
lending regulation shocks on SOA and reveal that SOA is slower after the rollover restrictions were
introduced.
Credit ratings, which constitute a proxy for the probability of default and play an important role
in financial markets, have been identified as a strong determinant of SOA heterogeneity. In particu-
lar, survey results in the study by Graham and Harvey (2001) indicate that CFOs focus on credit
ratings to guide debt decisions. Credit ratings enable markets and investors to set the required rate
of return in line with the level of default risk carried by the rated entity or financial security (Ferri
et al., 1999), thereby affecting the access to and costs of borrowed funds (Gu et al., 2018). Consistent
with this argument, Kisgen (2009) observes that firms adjust their capital structure towards the
target faster after being downgraded, whereas rating upgrades have no association with SOA.
Extending the study of Kisgen (2009), Huang and Shen (2015) demonstrate that firms adjust their
capital structure towards the optimal level faster in countries with better financial development and
strong legal and institutional environments than in weaker equivalents, regardless of the upgraded
and downgraded rating changes. Wojewodzki et al. (2018) focus on credit rating levels and provide
empirical evidence that firms with poorer credit ratings converge back to the target leverage sig-
nificantly faster than firms with better credit ratings. In contrast, Wojewodzki et al. (2020) focus on
financial institutions and find that credit ratings have relatively little economic effect on the speed
at which banks’ capital structure is adjusted towards the optimal level.
Jiang et al. (2017) use Chinese data, where bank concentration varies across both years and
provinces, and find that under-levered firms adjust back to the target leverage faster when bank
competition is high. They additionally find that smaller firms and non-state-owned firms exhibit a
faster SOA when bank competition is high. Im (2019) indicates that over-levered firms’ SOA and
peer firm shocks have a U-shaped relationship, while under-levered firms’ SOA monotonically
increases with peer firm shocks. An et al. (2015) show that firms with higher crash-risk exposure
tend to adjust more slowly towards the target leverage position. Their results further indicate that
the negative relation between crash-risk exposure and SOA is less pronounced in countries with a
more transparent information environment.
The effects of mergers and acquisitions (M&A) have also been analysed as an influential factor
for SOA. Uysal (2011) demonstrates that managers take deviations from their target capital struc-
tures into account when planning and structuring acquisitions. A higher likelihood of forgoing
valuable acquisition opportunities could generate quicker leverage adjustments for over-levered
firms. Khoo et al. (2017) argue that firms engaging in M&A activity deviate from their target lever-
age levels due to the financing transactions necessitated by the acquisition. Empirically, they find
that acquirers engaging in a leverage-increasing (leverage-decreasing) transaction subsequently
decrease (increase) their leverage ratios. Acquirers, regardless of the way in which they finance
acquisitions, actively rebalance their leverage by incorporating 22% to 62% of the leverage devia-
tion in the acquisition year.
470 Australian Journal of Management 49(3)

3.6. Economy-wide attributes

According to Haas and Peeters (2006), financial development can increase the capital stock and
productivity, enhancing economic development. To obtain a better understanding of the quantita-
tive and qualitative development of financial systems, they analyse a sample of firms in 10 Central
and Eastern European countries from 1993 to 2001 and show that the gradual development of
financial systems enables firms to bring their actual capital structure closer to the target structure.
Similar results are observed by Antoniou et al. (2008), who confirm that the speed at which firms
adjust their capital structure crucially depends on the financial system and corporate governance
traditions of each country. Öztekin and Flannery (2012) show that firms from countries with better
functioning financial systems, a financial structure based on the effectiveness of capital markets
instead of intermediaries and strong legal institutions adjust towards their target leverage as much
as 50% more rapidly. Regarding financial institutions, Jonghe and Öztekin (2015) demonstrate that
banks have a faster SOA in countries with more developed capital markets, more stringent capital
requirements, better supervisory monitoring and higher inflation. In times of crises, banks adjust
their capital structure more quickly.
Similarly, Drobetz et al. (2015) find that firms in market-based countries rebalance faster after
leverage shocks than firms in bank-based countries. In addition, their results reveal that firms
adjust towards the target leverage level more slowly during bad macroeconomic states and the
business cycle effect is more pronounced for financially constrained firms in market-based coun-
tries. Also, Cook and Tang (2010) demonstrate that firms tend to adjust faster towards the target
leverage level in good macroeconomic states embodying firms’ favourable access to capital mar-
kets, as defined by term spread, default spread, GDP growth rate and dividend yield. Differentiating
between financially unconstrained and constrained firms, their results still exhibit a faster SOA in
good states compared to bad states, regardless of firms’ access to external capital markets.
Meanwhile, Baum et al. (2017) document that over-levered firms converge back to the optimal
capital structure more rapidly when macroeconomic risk is low. In contrast, under-levered firms
adjust more quickly towards the target leverage in times of low firm-specific risk and high macro-
economic risk. Ahsan and Qureshi (2017) document a slower SOA towards the short-term target
capital structure during a post-financial liberalization period as compared to a pre-financial liber-
alization period. Mai et al. (2017) investigate whether in China, a country large in size, geographi-
cally diverse and imbalanced in regional economic development, there is a significant difference
in SOA of firms located in different regions during the macroeconomic recovery period. Their
results indicate that during the process of economic recovery, there are apparent regional variations
in SOA where the fastest adjustment in capital structure is in East China while that of West China
followed and that of Mid China was the slowest.

4. Suggestions for future research

In the preceding section, we have reviewed and critiqued studies that provide insights into deter-
minants of SOA heterogeneity. Although the discussed literature suggests many important deter-
minants in explaining SOA variations, we believe that there is still a considerable amount for us
to understand and there are many opportunities for future research, some of which are identified
above.
More broadly, in our survey, most studies have concentrated on the US market and developed
countries. Since legal systems, the rule of law and investor protection in developing countries
are not as effective as those in developed countries, we encourage future research to explore
SOA determinants in developing countries to bridge gaps in the literature and provide a more
Nguyen et al. 471

comprehensive global picture in explaining SOA heterogeneity. For example, firms in Asian
emerging countries are increasingly important in the fostering of global economic development.
Also, most Asian firms are state-owned or family-owned enterprises, which differs from the
ownership dynamics in developed countries. Huang et al. (2021a) note that the unique institu-
tional features in Asia make future research on finance more fruitful. Given the recent rise of the
Asian economies and increasing globalization, there is a growing interest in studying the SOA
heterogeneity in China, which is the largest developing country and undergoing the transition
from a command economy to a market economy. However, SOA research still remains under-
explored in other Asian developing countries. Thus, the literature on SOA heterogeneity can be
enriched by findings from Asian emerging markets. Future research also can consider conduct-
ing cross-country studies in the Asian region.
Recently, the COVID-19 pandemic impacted the world with long-lasting negative effects on the
global economic system (Goodell, 2020). The eruption of COVID-19 across countries around the
world caused significant fluctuations in stock, gold and cryptocurrency markets (Huang et al.,
2021a). Due to national lockdowns in many countries, economic activities were greatly inhibited
and the COVID-19 pandemic has created a large macroeconomic shock to firm revenues, operating
profit and the net income (Vo et al., 2021). Central banks and governments responded quickly by
employing their policy instruments in the financial markets (Zhang et al., 2020b). For example, the
Federal Reserve (FED) announced a 0% interest rate policy and US$700 billion quantitative easing
programme. In Australia, the government announced various financial supports to ease the finan-
cial burden experienced by Australian businesses as a result of the economic fallout from the
COVID-19 lockdown and social distancing measures such as the introduction of the JobKeeper
Payment scheme and the Boosting Cash Flow for Employers policy. These regulatory and govern-
ment responses may have potentially lowered debt-financing costs and reduced financing frictions
relative to otherwise, thereby affecting SOA decision-making. Due to the importance of under-
standing how firm capital structures evolve over time and the related link to SOA heterogeneity, we
encourage future research to investigate whether and how the COVID-19 crisis is associated with
SOA outcomes.
According to Drobetz et al. (2015), SOA depends on two aspects, namely costs associated with
deviating from the target leverage level and costs of adjusting back to the target. Thus, financial
managers should be looking to minimize these costs by assessing the trade-off between the costs
of being away from the target and adjustment costs. The study of Mukherjee and Wang (2013) dif-
fers from other empirical studies in the SOA literature focusing on the role of leverage adjustment
costs by emphasizing the linkage between adjustment benefits and SOA. Since leverage adjust-
ments should rationally commence only when adjustment benefits are sufficient to offset the costs
of converging back to the target, we encourage future research to consider leverage adjustment
benefits and costs simultaneously in analysing SOA decision-making.
Although literature on the determinants of SOA is extensive, research into the effects of capital
structure adjustments towards the target level is still limited. Dai and Piccotti (2020) recently find
that, in the presence of a target debt ratio, a firm’s expected return on equity is a function of the
association between the distance from the target leverage ratio and the SOA, although the direc-
tion of this relation is dependent on whether the firm is over- or under-leveraged. Extensions
could involve evaluating the association of SOA movements with changes to shareholders’ sys-
tematic risk levels, financing-level attributes such as credit ratings or credit score metrics, firm
quality or valuation indicators and wider market measures such as stock price crash risk or stock
liquidity. This may also raise modelling or estimation advances such as addressing potential
reverse causality or endogeneity considerations or developing multi-stage or nested models based
around SOA dynamics. Furthermore, the question of how firms choose their capital structure
represents a fundamental decision, which should support and be consistent with firm long-term
472 Australian Journal of Management 49(3)

strategies (Andrews, 1980). Future research can also investigate how SOA affects firm-specific
goals and other investment or distribution decisions and their long-term development.

5. Conclusion
In this article, we review empirical studies on the determinants of the SOA heterogeneity. In our litera-
ture survey, the SOA drivers are categorized into six groups, namely, (1) fundamental and operational
characteristics, (2) financial reporting and managerial incentives, (3) corporate governance and moni-
toring structures, (4) informal institutions, (5) financial market attributes and (6) economy-wide attrib-
utes. Within these categories we identify other potential determinants worthy of investigation.
Other key insights on SOA behaviour and decision-making drawn from our literature survey
include the existence of SOA asymmetry depending on the nature of the firm leverage position
relative to target levels, the extent of firm-level financial flexibility, the structure of institutional
environments and level of financial market development and in response to external influences
such as decisions of external credit rating agencies. This suggests the relevance of further investi-
gation into potential channels through which adjustment costs and benefits are associated with
SOA dynamics. There is also surprisingly little research examining the consequences of SOA deci-
sions, including on firm valuation and outcomes for providers of capital and other firm stakehold-
ers. This could further extend to capital market and regulatory settings and means of addressing
firm-level constraints such as financial flexibility as well as new developments in corporate financ-
ing around both sourcing and blockchain technology being introduced into financial markets.
While the SOA literature has been expanding in recent years, our review indicates that some
lines of research have been pursued in only one country. In addition, most empirical studies about
SOA have been conducted in developed countries and regions such as the United States, the
Eurozone, Australia and New Zealand. An avenue for future useful research may be to consider
inter-country comparisons and predictions for countries with similar institutional features. Our
literature survey also indicates that the empirical studies on SOA heterogeneity are primarily based
on the static and dynamic trade-off theories. However, pecking order and market timing behaviours
are also incorporated into managerial SOA decision-making. Future research might further exam-
ine the validity and accuracy of these competing theories and perhaps develop a new conceptual
framework or theory to explain SOA.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iDs
Ha Thanh Nguyen https://orcid.org/0000-0003-1475-5829
Balachandran Muniandy https://orcid.org/0000-0002-2809-1595

Notes
1. Similar to Habib et al. (2018), working articles are excluded from our primary review because (1) these
articles are not adequately vetted by the review process, (2) it is difficult to identify working articles and
(3) unpublished articles may be published in subsequent years. There are a small number of published
articles not in ABDC A*- or A-ranked journals that are cited in the article as they form part of argument
development.
2. From a research design perspective, cross-country studies are subject to concerns such as the likelihood
of endogeneity associated with country-level variables, noisy variables and problems of severely corre-
lated omitted variables related to cross-country sample constructs. However, they also provide the poten-
tial to draw broader and more compelling conclusions about key SOA determinants and provide a means
Nguyen et al. 473

to identify the importance of market or institutional attributes and differences on SOA decision-making.
As such, future research should weigh up these costs and benefits and determine whether estimation and
methodological approaches can be applied to facilitate valid conducting of cross-country SOA heteroge-
neity studies.
3. Financial reporting provides information on the amount, timing and uncertainty of the future cash flows
in an entity (Shakespeare, 2020).

References
Abdeljawad I and Nor FM (2017) The capital structure dynamics of Malaysian firms: Timing behaviour vs
adjustment toward the target. International Journal of Managerial Finance 13: 226–245.
Aderajew TS, Trujillo-Barrera A and Pennings JME (2019) Dynamic target capital structure and speed of
adjustment in farm business. European Review of Agricultural Economics 46: 637–666.
Ahmad R and Etudaiye-Muhtar OF (2017) Dynamic model of optimal capital structure: Evidence from
Nigerian listed firms. Global Business Review 18: 590–604.
Ahsan T and Qureshi MA (2017) The impact of financial liberalization on capital structure adjustment in
Pakistan: A doubly censored modelling. Applied Economics 49: 4148–4160.
Alalmai S, Al-Awadhi AM, Hassan MK, et al. (2020) The influence of religion on determinants of capital
structure: The case of Saudi Arabia. Journal of Islamic Accounting and Business Research 11: 472–497.
Alnori F and Alqahtani F (2019) Capital structure and speed of adjustment in non-financial firms: Does sharia
compliance matter? Evidence from Saudi Arabia. Emerging Markets Review 39: 50–67.
Alves P, Couto EB and Francisco PM (2015) Board of directors’ composition and capital structure. Research
in International Business and Finance 35: 1–32.
An Z, Chen C, Li D, et al. (2021) Foreign institutional ownership and the speed of leverage adjustment:
International evidence. Journal of Corporate Finance 68: 1–21.
An Z, Li D and Yu J (2015) Firm crash risk, information environment, and speed of leverage adjustment.
Journal of Corporate Finance 31: 132–151.
Andrews KR (1980) The Concept of Corporate Strategy. Homewood, IL: Irwin Publishing.
Antoniou A, Guney Y and Paudyal K (2008) The determinants of capital structure: Capital market-oriented
versus bank-oriented institutions. The Journal of Financial and Quantitative Analysis 43: 59–92.
Atawnah N, Balachandran B, Duong HN, et al. (2018) Does exposure to foreign competition affect stock
liquidity? Evidence from industry-level import data. Journal of Financial Markets 39: 44–67.
Aybar-Arias C, Casino-Martınez A and Lopez-Gracia J (2012) On the adjustment speed of SMEs to their
optimal capital structure. Small Business Economics 39: 977–996.
Baker M and Wurgler J (2002) Market timing and capital structure. The Journal of Finance 57: 1–32.
Baum CF, Caglayan M and Rashid A (2017) Capital structure adjustments: Do macroeconomic and business
risks matter? Empirical Economics 53: 1463–1502.
Biddle GC, Hilary G and Verdi RS (2009) How does financial reporting quality relate to investment effi-
ciency? Journal of Accounting and Economics 48: 112–131.
Blundell R and Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models.
Journal of Econometrics 87: 115–143.
Brisker ER and Wang W (2017) CEO’s inside debt and dynamics of capital structure. Financial Management
46: 655–685.
Byoun S (2008) How and when do firms adjust their capital structures toward targets? The Journal of Finance
63: 3069–3096.
Chang Y, Chen Y, Chou RK, et al. (2015) Corporate governance, product market competition and dynamic
capital structure. International Review of Economics and Finance 38: 44–55.
Chang Y, Chou RK and Huang T (2014) Corporate governance and the dynamics of capital structure: New
evidence. Journal of Banking and Finance 48: 374–385.
Cheng Q and Warfield TD (2005) Equity incentives and earnings management. The Accounting Review 80:
441–476.
Cook DO and Tang T (2010) Macroeconomic conditions and capital structure adjustment speed. Journal of
Corporate Finance 16: 73–87.
474 Australian Journal of Management 49(3)

Dai N and Piccotti LR (2020) Required return on equity when capital structure is dynamic. Financial
Management 49: 265–289.
Dang TL, Dang VA, Moshirian F, et al. (2019) News media coverage and corporate leverage adjustment.
Journal of Banking and Finance 109: 1–22.
Dang VA and Garrett I (2015) On corporate capital structure adjustments. Finance Research Letters 14:
56–63.
Dang VA, Kim M and Shin Y (2012) Asymmetric capital structure adjustments: New evidence from dynamic
panel threshold models. Journal of Empirical Finance 19: 465–482.
Dang VA, Kim M and Shin Y (2014) Asymmetric adjustment toward optimal capital structure: Evidence
from a crisis. International Review of Financial Analysis 33: 226–242.
DeAngelo H, DeAngelo L and Whited TM (2011) Capital structure dynamics and transitory debt. Journal of
Financial Economics 99: 235–261.
Detthamrong U, Chancharat N and Vithessonthi C (2017) Corporate governance, capital structure and firm
performance: Evidence from Thailand. Research in International Business and Finance 42: 689–709.
Devos E, Rahman S and Tsang D (2017) Debt covenants and the speed of capital structure adjustment.
Journal of Corporate Finance 45: 1–18.
Do TK, Laic TN and Tran TTC (2020) Foreign ownership and capital structure dynamics. Finance Research
Letters 36: 1–7.
Drobetz W, Schilling DC and Schröder H (2015) Heterogeneity in the speed of capital structure adjustment
across countries and over the business cycle. European Financial Management 21: 936–973.
Elsas R and Florysiak D (2011) Heterogeneity in the speed of adjustment toward target leverage. International
Review of Finance 11: 181–211.
Elsas R, Flannery MJ and Garfinkel JA (2014) Financing major investments: Information about capital struc-
ture decisions. Review of Finance 18: 1341–1386.
Faccio M (2006) Politically connected firms. The American Economic Review 96: 369–386.
Fama EF and French KR (2002) Testing trade-off and pecking order predictions about dividends and debt.
Review of Financial Studies 15: 1–33.
Fan JPH and Wong TJ (2005) Do external auditors perform a corporate governance role in emerging markets?
Evidence from East Asia. Journal of Accounting Research 43(1): 35–72.
FASB (2010) Statement of Financial Accounting Concepts No, 8, Conceptual Framework for Financial
Reporting – Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3,
Qualitative Characteristics of Useful Financial Information. Norwalk, CT: FASB.
Faulkender MW, Flannery MJ, Hankins KW, et al. (2012) Cash flows and leverage adjustments. Journal of
Financial Economics 103: 632–646.
Ferri G, Liu LG and Stiglitz JE (1999) The procyclical role of rating agencies: Evidence from the East Asian
crisis. Economic Notes 28: 335–355.
Fisman R (2001) Estimating the value of political connections. The American Economic Review 91: 1095–
1102.
Fitzgerald J and Ryan J (2019) The impact of firm characteristics on speed of adjustment to target leverage:
A UK study. Applied Economics 51: 315–327.
Flannery MJ and Hankins KW (2013) Estimating dynamic panel models in corporate finance. Journal of
Corporate Finance 19: 1–19.
Flannery MJ and Rangan KP (2006) Partial adjustment toward target capital structures. Journal of Financial
Economics 79: 469–506.
Frank MZ and Goyal VK (2004) The effect of market conditions on capital structure adjustment. Finance
Research Letters 1: 47–55.
González VM and González F (2011) Firm size and capital structure: Evidence using dynamic panel data.
Applied Economics 44: 4745–4754.
Goodell J (2020) COVID-19 and finance: Agendas for future research. Finance Research Letters 35: 1–5.
Graham JR and Harvey CR (2001) The theory and practice of corporate finance: Evidence from the field.
Journal of Financial Economics 60: 187–243.
Gu X, Kadiyala P and Mahaney-Walter XW (2018) How creditor rights affect the issuance of public debt: The
role of credit ratings. Journal of Financial Stability 39: 133–143.
Nguyen et al. 475

Haas RD and Peeters M (2006) The dynamic adjustment towards target capital structures of firms in transition
economies. Economics of Transition 14: 133–169.
Habib A, Hasan MM and Jiang H (2018) Stock price crash risk: Review of the empirical literature. Accounting
& Finance 58: 211–251.
Hail L, Leuz C and Wysocki P (2010) Global accounting convergence and the potential adoption of IFRS by
the U.S. (Part I): Conceptual underpinnings and economic analysis. Accounting Horizons 24: 355–394.
He W and Kyaw NA (2018) Capital structure adjustment behaviours of Chinese listed companies: Evidence
from the Split Share Structure Reform in China. Global Finance Journal 36: 14–22.
Hilary G and Hui KW (2009) Does religion matter in corporate decision making in America? Journal of
Financial Economics 93: 455–473.
Ho L, Lu Y and Bai M (2020) Liquidity and speed of leverage adjustment. Australian Journal of Management
46: 76–109.
Hogg A and Abrams D (1988) Social Identifications: A Social Psychology of Intergroup Relations and Group
Processing. London: Routledge.
Huang HJ, Habib A, Sun SL, et al. (2021a) Financial reporting and corporate innovation: A review of the
international literature. Accounting & Finance 61: 5439–5499.
Huang P, Lu Y and Faff R (2021b) Social trust and the speed of corporate leverage adjustment: Evidence from
around the globe. Accounting & Finance 61: 3261–3303.
Huang R and Ritter JR (2009) Testing theories of capital structure and estimating the speed of adjustment.
Journal of Financial and Quantitative Analysis 44: 237–271.
Huang Y and Shen C (2015) Cross-country variations in capital structure adjustment – The role of credit rat-
ings. International Review of Economics and Finance 39: 277–294.
Im HJ (2019) Asymmetric peer effects in capital structure dynamics. Economics Letters 176: 17–22.
Jensen MC (1986) Agency costs of free cash flow, corporate finance and takeovers. The American Economic
Review 76: 323–329.
Jensen MC and Meckling WH (1976) Theory of the firm: Managerial behaviour, agency costs and ownership
structure. Journal of Financial Economics 3: 305–360.
Jiang F, Jiang Z, Huang J, et al. (2017) Bank competition and leverage adjustments. Financial Management
46: 995–1022.
Jonghe OD and Öztekin O (2015) Bank capital management: International evidence. Journal of Financial
Intermediation 24: 154–177.
Kayo EK and Kimura H (2011) Hierarchical determinants of capital structure. Journal of Banking and
Finance 35: 358–371.
Khoo J, Durand RB and Rath S (2017) Leverage adjustment after mergers and acquisitions. Accounting &
Finance 57: 185–210.
Kim J, Lee JJ and Park JC (2015) Audit quality and the market value of cash holdings: The case of office-level
auditor industry specialization. Auditing: A Journal of Practice & Theory 34: 27–57.
Kisgen DJ (2009) Do firms target credit ratings or leverage levels? The Journal of Financial and Quantitative
Analysis 44: 1323–1344.
Kumar S, Colombage S and Rao P (2017) Research on capital structure determinants: A review and future
directions. International Journal of Managerial Finance 13: 106–132.
Kumar S, Sureka R and Colombage S (2020) Capital structure of SMEs: A system literature review and bib-
liometric analysis. Management Review Quarterly 70: 535–565.
Lartey T, Kesse K and Danso A (2020) CEO extraversion and capital structure decisions: The role of firm
dynamics, product market competition and financial crisis. The Journal of Financial Research 43:
847–893.
Leary MT and Roberts MR (2005) Do firms rebalance their capital structures? The Journal of Finance 60:
2575–2619.
Li D, Jiang Q and Mai Y (2019) Board interlocks and capital structure dynamics: Evidence from China.
Accounting & Finance 59: 1893–1922.
Li W, Wu C, Xu L, et al. (2017) Bank connections and the speed of leverage adjustment: Evidence from
China’s listed firms. Accounting & Finance 57: 1349–1381.
476 Australian Journal of Management 49(3)

Liao L, Mukherjee T and Wang W (2015) Corporate governance and capital structure dynamics: An empirical
study. The Journal of Financial Research 38: 169–191.
Liu H, Chiang Y and Tsai H (2020) The impact of loan rollover restrictions on capital structure adjustments,
leverage deviations, and firm values. Pacific-Basin Finance Journal 62: 1–17.
Lo K, Ramos F and Rogo R (2017) Earnings management and annual report readability. Journal of Accounting
and Economics 63: 1–25.
Lockhart GB (2014) Credit lines and leverage adjustments. Journal of Corporate Finance 25: 274–288.
McGuire ST, Omer TC and Sharp NY (2012) The impact of religion on financial reporting irregularities. The
Accounting Review 87: 645–673.
Mai Y, Meng L and Ye Z (2017) Regional variation in the capital structure adjustment speed of listed firms:
Evidence from China. Economic Modelling 64: 288–294.
Malmendier U, Tate G and Yan J (2011) Overconfidence and early-life experiences: The effect of managerial
traits on corporate financial policies. The Journal of Finance 66: 1687–1733.
Modigliani F and Miller MH (1958) The cost of capital, corporation finance and the theory of investment. The
American Economic Review 48: 261–297.
Morellec E, Nikolov B and Schürhoff N (2012) Corporate governance and capital structure dynamics. The
Journal of Finance 67: 803–848.
Mukherjee T and Wang W (2013) Capital structure deviations and speeds of adjustment. Financial Review
48: 597–615.
Myers SC and Majluf NS (1984) Corporate financing and investment decisions when firms have information
that investors do not have. Journal of Financial Economics 13: 187–221.
Nguyen HT and Muniandy B (2021) Gender, ethnicity and stock liquidity: Evidence from South Africa.
Accounting & Finance 61: 2337–2377.
Nguyen T, Bai M, Hou G, et al. (2021a) Speed of adjustment towards target leverage: Evidence from a quan-
tile regression analysis. Accounting & Finance 61: 5073–5109.
Nguyen T, Bai M, Hou G, et al. (2021b) Corporate governance and dynamics capital structure: Evidence from
Vietnam. Global Finance Journal 48: 100554.
Nieto B and Rodriguez R (2015) Corporate stock and bond return correlations and dynamic adjustments of
capital structure. Journal of Business Finance & Accounting 42: 705–746.
Öztekin O (2015) Capital structure decisions around the world: Which factors are reliably important? Journal
of Financial and Quantitative Analysis 50: 301–323.
Öztekin O and Flannery MJ (2012) Institutional determinants of capital structure adjustment speeds. Journal
of Financial Economics 103: 88–102.
Parsons C and Titman S (2008) Empirical capital structure: A review. Foundations and Trends in Finance
3: 1–93.
Pindado J, Requejo I and Torre CDL (2015) Does family control shape corporate capital structure? An empiri-
cal analysis of Eurozone firms. Journal of Business Finance & Accounting 42: 965–1006.
Rahman S (2020) Credit supply and capital structure adjustments. Financial Management 49: 949–972.
Ramalingegowda S and Yu Y (2018) The role of accounting conservatism in capital structure adjustments.
Journal of Accounting, Auditing and Finance 36: 1–26.
Rjiba H, Saadi S, Boubaker S, et al. (2021) Annual report readability and the cost of equity capital. Journal
of Corporate Finance 67: 101902.
Shakespeare C (2020) Reporting matters: The real effects of financial reporting on investing and financing
decisions. Accounting and Business Research 50: 425–442.
Shikimi M (2020) Bank loan supply shocks and leverage adjustment. Economic Modelling 87: 447–460.
Smith DJ, Chen J and Anderson HD (2015) The influence of firm financial position and industry characteris-
tics on capital structure adjustment. Accounting & Finance 55: 1135–1169.
Tekin H (2020) Market differences and adjustment speed of debt, equity, and debt maturity. Australian
Journal of Management 46: 1–23.
Uysal VB (2011) Deviation from the target capital structure and acquisition choices. Journal of Financial
Economics 102: 602–620.
Nguyen et al. 477

Vo TA, Mazur M and Thai A (2021) The impact of COVID-19 economic crisis on the speed of adjustment
toward target leverage ratio: An international analysis. Finance Research Letters 45: 1–8.
Warr RS, Elliott WB, Koëter-Kant J, et al. (2012) Equity mispricing and leverage adjustment costs. Journal
of Financial and Quantitative Analysis 47: 589–616.
West SC, Mugera AW and Kingwell RS (2021) Drivers of farm business capital structure and its speed of
adjustment: Evidence from Western Australia’s Wheatbelt. The Australian Journal of Agricultural and
Resource Economics 65: 391–412.
Weston J, Butler A and Grullon G (2005) Stock market liquidity and the cost of issuing equity. Journal of
Financial and Quantitative Analysis 40: 331–348.
Wojewodzki M, Boateng A and Brahma S (2020) Credit rating, banks’ capital structure and speed of adjust-
ment: A cross-country analysis. Journal of International Financial Markets, Institutions & Money 69:
1–20.
Wojewodzki M, Poon WPH and Shen J (2018) The role of credit ratings on capital structure and its speed of
adjustment: An international study. The European Journal of Finance 24: 735–760.
Yuan R, Sun J and Cao F (2016) Directors’ and officers’ liability insurance and stock price crash risk. Journal
of Corporate Finance 37: 173–192.
Zhang D, Hu M and Ji Q (2020a) Financial markets under the global pandemic of COVID-19. Finance
Research Letters 36: 1–6.
Zhang J, Zhao Z and Jian W (2020b) Do cash flow imbalances facilitate leverage adjustments of Chinese
listed firms? Evidence from a dynamic panel threshold model. Economic Modelling 89: 201–214.
Zhou Q, Tan KJK, Faff R, et al. (2016) Deviation from target capital structure, cost of equity and speed of
adjustment. Journal of Corporate Finance 39: 99–120.