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Capital structure and corporate reaction to negative stock return shocks

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  • Won Seo, Sung
  • Jin Chung, Hae

Abstract

This study investigates firms’ capital structure decisions around significant drops in stock price. We present evidence that firms usually repurchase equity to boost stock prices following these shocks, rather than retiring debt to rebalance their capital structures, even though buybacks cause their capital structures to deviate farther from the previous levels. We also show that managerial incentives and firms’ historical financial policies (e.g., high cash holdings or almost zero leverage) play more important roles in determining how firms react to stock price shocks than do managers’ desires to maintain optimal leverage.

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  • Won Seo, Sung & Jin Chung, Hae, 2017. "Capital structure and corporate reaction to negative stock return shocks," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 292-312.
    • Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:292-312
    DOI: 10.1016/j.iref.2017.02.005
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    2. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.
    3. Lee, Chi-Chuan & Lee, Chien-Chiang & Xiao, Shunyi, 2021. "Policy-related risk and corporate financing behavior: Evidence from China’s listed companies," Economic Modelling, Elsevier, vol. 94(C), pages 539-547.
    4. Aly Saad Mohamed Dawood & Mahmoud Otaify, 2021. "Target Capital Structure of Egyptian Listed Firms: Importance of Growth and Risk Factors," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(1), pages 158-173, January.
    5. Shan, Yuan George & Wang, Yirui & Wu, Wuqing & Zhen, Weihao, 2023. "Does the Achilles heel of guarantee networks drive financial distress?," International Review of Financial Analysis, Elsevier, vol. 87(C).
    6. HERCIU Mihaela & OGREAN Claudia, 2017. "Does Capital Structure Influence Company’S Profitability?," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 12(3), pages 50-62, December.

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