From the modeling perspective, this Nepicastat study employs relatively advanced econometric techniques for dynamic panel data models that combine the features of time series and cross-sectional data. To examine dynamic adjustment behavior and a firm\'s specific determinants for target debt ratio, most studies have employed a “partial adjustment model” of debt that captures the actual debt ratio change as a fraction of the desired change towards target debt ratio.
We follow the conventions of previous research (e.g. Ozkan, 2001, Fama and French, 2002 and Flannery and Rangan, 2006) in applying “partial adjustment model” of debt to test the prediction of the trade-off theory. The partial adjustment model equations are as specified below:equation(1)DEBTi,t−DEBTi,t−1=γDEBTi,t*−DEBTi,t−1+εi,t.
This model measures the change in debt between two periods. The first term on the right side of the equation is semen the speed of adjustment, γ; the speed by which firms adjust towards their target debt ratio from their debt ratio in the previous period. The target debt ratio is measured as:equation(2)DEBTi,t*=βXi,t′.
We follow the conventions of previous research (e.g. Ozkan, 2001, Fama and French, 2002 and Flannery and Rangan, 2006) in applying “partial adjustment model” of debt to test the prediction of the trade-off theory. The partial adjustment model equations are as specified below:equation(1)DEBTi,t−DEBTi,t−1=γDEBTi,t*−DEBTi,t−1+εi,t.
This model measures the change in debt between two periods. The first term on the right side of the equation is semen the speed of adjustment, γ; the speed by which firms adjust towards their target debt ratio from their debt ratio in the previous period. The target debt ratio is measured as:equation(2)DEBTi,t*=βXi,t′.
