A note on capital structure target adjustment - Indonesian evidence

Purpose: The purpose of this paper is to investigate whether existing capital structure target adjustment models are able to identify whether companies adjust their capital structures towards an (unobservable) target. Design/methodology/approach: Existing capital structure target adjustment models are applied to a specific dataset by using different regression techniques (ordinary least square, fixed effect, Fama-MacBeth, least square dummy variable "corrected", SYS-GMM). Findings: Existing capital structure target adjustment models are not able to identify whether companies adjust their capital structures towards a target or not. They might indeed indicate target adjustment behaviour when companies' capital structures actually move away from their targets. Research limitations/implications: As target adjustment behaviour is often used as support for the trade-off and against the pecking order theory, the "horse race" between both theories seems still to be open. Originality/value: This paper highlights some of the fallacies of existing capital structure target adjustment models and demonstrates that the results obtained by those models can be highly misleading.