Target Capital Structure Dynamics: Evidence from France, Germany, the Netherlands and UK

Capital structure has long been debated in theory and empirical studies. Capital structure decision is of utmost importance for non-financial companies because it represents a key part of the financial strategy. The dynamics of capital structure is investigated in this study for companies in four European countries: France, Germany, the Netherlands and UK. Non-financial firms are assumed to have target debt ratios and they tend to follow this ratio. The target debt ratio is determined by firm specific variables, which are influenced by institutional, legal and macroeconomic factors specific to each country. Changes in capital structure are influenced by the financial position of a firm at a specific point of time, its cash flows and its stock returns. The adjustment process is determined by the target debt ratio, the distance between the actual and the target ratio and also by firm-specific factors.