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    Heterogeneity in Speed of Adjustment using Finite Mixture Models

    Access Status
    Fulltext not available
    Authors
    Durand, Robert
    Greene, William
    Harris, Mark
    Khoo, Joye
    Date
    2021
    Type
    Journal Article
    
    Metadata
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    Citation
    Durand, R. and Greene, W.H. and Harris, M. and Khoo, J. 2021. Heterogeneity in Speed of Adjustment using Finite Mixture Models. Economic Modelling. 107: Article No. 105713.
    Source Title
    Economic Modelling
    DOI
    10.1016/j.econmod.2021.105713
    ISSN
    0264-9993
    Faculty
    Faculty of Business and Law
    School
    School of Accounting, Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/88779
    Collection
    • Curtin Research Publications
    Abstract

    Many empirical analyses of firms' speed of leverage adjustment (SOA) impose a strong constraint: an average SOA is estimated for all firms in a sample. We demonstrate the usefulness of finite mixture models (FMM) in corporate finance by analysing estimates of firms' SOA. Applying FMM to a sample of US firms during 1972–2017, we find five distinct types of firm behaviours, each with its own SOA. Moreover, the same explanatory variables can have quite differing effects across the groups. We also offer the applied researcher a battery of validation techniques that can be used in a FMM context. FMM should be a standard part of finance researchers’ tool-kits.

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