Description:
If firms adjust their capital structures toward targets, and if there are adverse selection costs associated with asymmetric information, how and when do firms adjust their capital structures? We suggest a financing-needs-induced adjustment framework to examine the dynamic process by which firms adjust their capital structures. We find that most adjustments occur when firms have above-target debt with a financial surplus or when they have below-target debt with a financial deficit. These results suggest that firms move toward the target capital structure when they face a financial deficit/surplus --- but not in the manner hypothesized by the traditional pecking-order theory