Speed of Adjustment and Leverage Deviation - Cost of Equity Nexus: Evidence from Emerging Markets and Crisis

Purpose: This study investigates the impact of leverage deviation on the cost of equity under the specifically mentioned condition in ASEAN-5 considering the global financial crisis and the sensitivity of the cost of equity on leverage deviation. 
Design/methodology/approach: This study employs the Generalized Least Square (GLS) model and the dynamic panel estimation based on the two-step difference GMM to analyze the data. 
Findings: The regression analysis found deviated from the target leverage impact unfavorably on the firm's cost of equity. The results also show that the more sensitive the cost of equity is to the leverage deviation from the target, the faster the adjustment. However, firms will adjust their capital structure for a lower cost during the crisis. Additionally, it shows a compelling behavior in the relation between the sensitivity of the cost of equity to leverage deviation on the leverage speed of adjustments. 
Research limitations/implications: The higher sensitivity of the cost of equity is to the leverage deviation from the target, the faster the adjustment. It implies that the disregard of heterogeneity in SOA will mislead the adjustment period to the target leverage. 
Originality/value: Using manually collected data, this study provides empirical evidence on the importance of leverage deviation and the sensitivity of the cost of equity and the speed of adjustment to the target debt level to analyze capital structure decision in an enormous leverage usage in ASEAN. Second, this paper presents new evidence of the effect both in normal economic conditions and crisis periods, which is rarely examined in the ASEAN emerging market.