On the speed of adjustment (SOA) toward the target financial leverage ratios and its determinants: Evidence from the capital structure of the ICT sector

Agency problems and informational asymmetries are widespread concerns in the information and communication technology (ICT) sector. Do they affect capital structure decisions? Do they make capital structure adjustments more costly? Do they function as debt control mechanisms? We address these questions using a dynamic adjustment model of capital structure for a panel of 85 ICT firms over the years 1990 to 2013, augmented by measures of agency costs and informational asymmetries, and expand on this literature to include two additional determinants: R&D activity as a direct measure of asymmetric information and asset turnover as an inverse measure of firm agency costs. We find that both agency costs and informational asymmetries play a significant role in managerial capital structure decisions, causing ICT firms to maintain a low level of debt. We also find that ICT firms adjust their capital structure more slowly than the average firms, as reported in the extant literature, and the speed of adjustment increases with firm size, growth opportunities, and distance from the target capital structure and decreases with default risk and agency costs. We estimate the model using several newly developed econometric methods, but the findings do not show any significant difference, a strong indication of the model's reliability. We reinforce the validity of our results by conducting robustness checks by splitting the sample into three subsamples.