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Volume 20, Number 1 / March 2016 , Pages 1-83
Multinational Finance Journal, 2016 vol. 20, no. 1, pp. 1-39 |
Costas Lambrinoudakis , University of Piraeus, Greece    Corresponding Author

Dynamic trade-off models of capital structure predict negative correlation between adjustment speed and adjustment costs. This paper empirically tests this prediction by bringing together elements from two strands of the literature: dynamic capital structure and security offerings literature. In contrast to existing studies, this approach employs directly measurable proxies for adjustment cost (security issuance cost) determinants. The correlation between adjustment costs and the speed of adjustment is found to be positive or zero. From a dynamic trade-off perspective, these results are puzzling as they suggest that transaction costs cannot explain the observed pattern of the capital structure adjustment process.

Keywords : capital structure; target leverage; adjustment speed; security issuance costs
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Multinational Finance Journal, 2016, vol. 20, no. 1, pp. 41-83 |
Kelly Burns , Curtin University, Australia    Corresponding Author

This study revisits the Meese-Rogoff puzzle by estimating the traditional monetary models of exchange rate determination in state-space form and comparing the accuracy of these forecasts against the naïve random walk model using a wide range of conventional and alternative measures of forecasting accuracy. The results demonstrate that incorporating stochastic movements in the parameters of exchange rate models does not enable the Meese-Rogoff puzzle to be overturned. However, estimating these models in state-space form substantially improves forecasting accuracy to the extent that the model and random walk produce an equivalent magnitude of error. Furthermore, the results prove that the Meese-Rogoff puzzle can be overturned if the forecasts are evaluated by alternative criteria. These criteria include direction accuracy, profitability, and measures that jointly take into account both magnitude and direction accuracy.

Keywords : forecasting; random walk; exchange rate models; time-varying parameters
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