Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?

Christopher F. Baum, Mustafa Caglayan, Abdul Rashid

Research output: Contribution to journalArticlepeer-review

28 Citations (Scopus)
104 Downloads (Pure)


We show that risk plays an important role in estimating the adjustment of the firm’s capital structure. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm’s current leverage, and its financial status. We also show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our investigation suggests that models without risk factors yield biased results.
Original languageEnglish
Pages (from-to)1463–1502
Number of pages40
JournalEmpirical Economics
Issue number4
Early online date23 Sept 2016
Publication statusPublished - Dec 2017


  • macroeconomic risk
  • business risk
  • capital structure rebalancing
  • speed of adjustment
  • deviations from target leverage
  • nancial decits/surpluses


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