Omar Camara, College of Business Administration, Prince Mohammad Bin Fahd University, Kingdom of Saudi Arabia
David McMillan, Stirling Management School, University of Stirling, U.K.

Published in

Volume 18, Issue 3, p69-84, October 2018


This paper examines the effect of market volatilities, and firm-specific financial efficiencies on the dynamics of capital structure of non-financial US firms. Since market volatility and market-based capital structure measurement are inversely related, fluctuations in equity valuations posed challenges to corporate manager’s target capital structure policies. Furthermore, the necessary rebalancing and speed of adjustment to target capital structure, induced by market volatilities, may vary among firms due to firm-specific characteristics, overall US economic conditions and global financing environment. There is an a posteriori substantiation in the extant literature, that the effect of financial efficiency on capital structure is antithetical to the effect of market volatility. This dichotomy between the effect of market risk and corporate financial efficiency on capital structure exposes a non-trivial managerial dilemma from a view that, corporate managers often have enormous influence on financial efficiency but a negligible influence on market volatility, at least in the short and medium term. In an attempt to understand this capital structure dynamics, this paper applied a portfolio approach by differentiating firms capital structure based on risk-return path-dependence , by assigning firms to portfolio groups, through an efficient combination of market volatility and financial efficiency. In both capital structure and partial adjustment models, the paper in addition to standard capital structure determinants, integrates domestic and global macroeconomic indicators, to account for the financing effect of economic interactions among US firms’, the US economy and the global economy. The paper shows that managers of relatively less risky and highly efficient firms revert to the desired capital structure relatively slower than their high risk- low efficient counterparts.


Capital structure, Market Risk, Portfolio, Financial Efficiency, Dynamic Panel

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