Capital Structure Adjustments: Do Macroeconomic and Business Risks Matter?

We empirically examine the association between firms ’ capital structure adjust-ments and risk. We find that the adjustment process is asymmetric and depends on the type of risk, its magnitude, the firm’s current leverage and its financial status. We also 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 struc-ture more quickly when both types of risk are low. Our findings help to explain why managers seek to time equity and debt markets.