Capital structure studies have generally been aimed at studying the determinants of optimal
leverage. Empirically, the focus is, however, on studying the association between observed
leverage and a set of explanatory variables. This approach has a number of shortcomings.
First, the observed leverage deviates from the optimal leverage. Second, the empirical
analyses are static. Third, adjustments are non-constant. In this paper, we formulate a
dynamic adjustment model. We specify and estimate the unobservable optimal capital …