Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?

We empirically examine the influence of risk on firms' capital structure adjustments. The process of adjustment is asymmetric and depends on the type of risk, its magnitude, the firm's actual leverage with respect to its target, and its financial status. We show that firms with financial surpluses and above-target leverage adjust their leverage more rapidly when firm-specific risk is low and when macroeconomic risk is high. Firms with financial deficits and below-target leverage adjust their capital structure more quickly when both types of risk are low. Our findings help to explain why managers seek to time equity and debt markets.