DYNAMIC CAPITAL STRUCTURE: EVIDENCE FROM THE SMALL DEVELOPING COUNTRY OF JORDAN

Abstract

This paper examines the determinants of the target capital structure of Jordanian manufacturing firms and the adjustment process towards this target. The study extends the empirical work on capital structure in two ways. First, it uses a dynamic model which sheds light on the dynamic nature of the capital structure adjustment process by firms. Second, the study employs a panel data analysis and GMM estimation techniques that control for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that Jordanian firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories, and the findings of the empirical literature, the results of this paper suggest that size, tangibility, profitability, growth opportunity, and earnings volatility exert significant effects on the capital structure choice of Jordanian firms.

JEL classification: G3, G32, C33

Key words: Dynamic capital structure, Asset tangibility, GMM estimation