Abstract: This paper investigates whether the speed of capital structure adjustment is symmetric around the optimal point from the perspective of loss aversion. We show that the downward adjustment speed of capital structure when it is above the optimal point is bigger than the upward, that is to say, the dynamic capital structure adjustment speed is asymmetric around the optimal point. The greater the bankruptcy risk is, the more asymmetric the dynamic capital structure adjustment speed is. The difference in the speed between the downward and the upward is attributed to the loss aversion of managers, not to the difference in adjustment cost. The abovementioned facts may reconcile contradictory empirical results between the timing theory advocates and trade-off theory supporters and extend the application scope of loss aversion in corporate finance.
Keywords: Dynamic Capital Structure Adjustment, Loss Aversion, Bankrupt Risk
source:Finance & Trade Economics ,No10,2013