Please cite this article as: Dang, V.A., Garrett, I., On Corporate Capital Structure Adjustments, Finance Research Letters (2015), doi: http://dx. AbstractRecent research has examined asymmetries in firms' adjustments toward target leverage.Assuming firms mainly adjust their debt levels, Byoun (2008) finds that firms adjusting most quickly possess two important characteristics: above-target debt and a financing surplus.Using alternative models allowing for adjustments in both debt and total assets, we still find evidence of asymmetries in leverage adjustments, but that firms adjusting fastest have abovetarget leverage and a financing deficit. Our paper shows how alternative assumptions about leverage dynamics may lead to different conclusions about target adjustment behavior. JEL Classification: G32. 161 275 0438, Fax +44 (0) 161 275 4023. + Ian Garrett, Email: Ian.Garrett@mbs.ac.uk, Manchester Business School, University of Manchester, Booth Street West, M15 6PB, UK, Tel: +44 (0)161 275 4958. AbstractRecent research has examined asymmetries in firms' adjustments toward target leverage.Assuming firms mainly adjust their debt levels, Byoun (2008) finds that firms adjusting most quickly possess two important characteristics: above-target debt and a financing surplus.Using alternative models allowing for adjustments in both debt and total assets, we still find evidence of asymmetries in leverage adjustments, but that firms adjusting fastest have abovetarget leverage and a financing deficit. Our paper shows how alternative assumptions about leverage dynamics may lead to different conclusions about target adjustment behavior. JEL Classification: G32. 161 275 0438, Fax +44 (0) 161 275 4023. + Ian Garrett, Email: Ian.Garrett@mbs.ac.uk, Manchester Business School, University of Manchester, Booth Street West, M15 6PB, UK, Tel: +44 (0)161 275 4958.3

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on Wed, AbstractWe analyze the dividend behavior of the aggregate stock market. We propose a model that assumes managers minimize the costs of adjustment associated with being away from their target dividend payout. The target is expressed as a function of lagged stock prices and permanent earnings, generalizing previous models of dividend behavior. We present a new method for measuring unobserved permanent earnings based on the Kalman filter. Our specification of dividend behavior is strongly supported by the data relative to both alternative models and over time. We flnd significant evidence of dividend smoothing and dividends conveying information regarding unexpected positive changes in current permanent earnings. We also find that both the speed of adjustment of dividends to target dividends and tests of signaling are sensitive to the specification of the model. I. IntroductionIn this paper, we propose a behavioral model of dividend policy that assumes there exists a target dividend level toward which managers adjust. In our model, there are costs associated with adjusting dividends and with deviating from the target dividend. Managers optimize by setting dividends to minimize these costs.Using this framework, we show that the well-known Lintner model, which is a special case of our model, has an unattractive feature: any growth in dividends that is not equal to the normal growth rate is penalized, irrespective of whether the growth brings the actual value closer to the target. In our model, movement toward the target lowers costs, even if adjustment costs prevent a complete movement to the target. Our model also allows us to generalize the Marsh and Merton (MM hereafter) (1987) model. MM specify the target dividend as a function of permanent earnings, which they measure by lagged stock prices. We add a measure of cur? rent permanent earnings to the model. The rationale for including both permanent earnings and lagged stock price is that an unexpected change in current permanent earnings, known by managers but not yet by the market, cannot be conveyed to the *Manchester School of Accounting and Finance, Manchester M13 9PL, UK, and Department of Financial Economics, Norwegian School of Management, Elias Smiths vei 15, N1301 Sandvika, Norway. We thank 0yvind B0hren, Wayne Ferson, Kristian Rydqvist, Vincent Warther and Michael Rozeff (the referees), Jonathan Karpoff (the editor), and seminar participants at the Norwegian School of Management for helpful comments on an earlier draft that improved the paper. Any errors are our responsibility.

If stock and stock index futures markets are functioning properly price movements in these markets should best be described by a first order vector error correction model with the error correction term being the price differential between the two markets (the basis). Recent evidence suggests that there are more dynamics present than should be in effectively functioning markets. Using self-exciting threshold autoregressive (SETAR) models, this study analyses whether such dynamics can be related to different regimes within which the basis can fluctuate in a predictable manner without triggering arbitrage. These findings reveal that the basis shows strong evidence of autoregressive behaviour when its value is between the two thresholds but that the extra dynamics disappear once the basis moves above the upper threshold and their persistence is reduced, although not eradicated, once the basis moves below the lower threshold. This suggests that once nonlinearity associated with transactions costs is accounted for, stock and stock index futures markets function more effectively than is suggested by linear models of the pricing relationship.

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We document the incidence of initial public offerings (IPOs) issued by UK companies with existing venture capital investors and sponsored (and underwritten) by issuing houses that are parents or affiliates of the venture capital backers. The effects on the performance of the stock offering of the resulting conflicts of interest between the venture capitalist-affiliated sponsors and the investors taking up the stock is examined. Contrary to the conflicts-ofinterest hypothesis, IPOs underwritten by VC affiliates perform better in the long-term than other IPOs. We also examine the role of the reputation of the financial firms involved in the IPO. The long-term performance of UK IPOs is found to be positively related to the reputation of the venture capital backers. In the short-term, IPO returns appear to be related to the prestige of the sponsor rather than the venture capitalist in that top fifteen underwriters are associated with lower short-returns. Although there is evidence of higher initial returns in IPOs where the sponsor and venture capitalist are affiliated, this is offset by an approximately equal reduction in initial returns if the venture capitalist is associated with an issuing house which may or may not act as the actual IPO sponsor. Thus, the net effect is that backing by venture capitalists with links to issuing houses reduces initial returns but only if those affiliates are in fact not employed as the actual sponsors to the offerings.