Leverage Deviation and Speed of Adjustment toward Target Leverage: Evidence from Indonesia Stock Exchange

Dwi Cahyaningdyah

Abstract

The study tested the heterogeneity and asymmetry of adjustment speed between groups of analyzes formed based on the interaction between the direction and distance of deviation from target leverage using two-step partial adjustment model. The results show speed adjustment differences among the analysis groups and the asymmetry of the speed of adjustment where the group deviated far above the target has the highest speed of adjustment and the group deviated near below the target of leverage has the lowest adjustment speed. The group of companies deviated far above the target bear the greatest deviation costs while companies in the group diverged near below the target bear the smallest deviation costs. This result is consistent with expectations that companies bearing the highest deviation costs have the greatest pressure to immediately return to the target leverage so that the speed of adjustment will be high, while companies bearing lower deviation costs do not have greater pressure to immediately return to the target leverage so that the speed adjustment towards the target will be lower.

Keywords

trade--off theory, target leverage, leverage deviation, speed of adjustment

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