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Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity

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  • Andres, Christian
  • Cumming, Douglas
  • Karabiber, Timur
  • Schweizer, Denis

Abstract

We analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure information asymmetry from equity liquidity through the use of an information asymmetry index that is based on six measures that capture trading activity, trading costs, and the price impact of order flow. Modeling the joint determination of leverage and liquidity, the data indicate that expected increases in leverage (target leverage changes) decrease the information asymmetry index. This is consistent with the signaling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.

Suggested Citation

  • Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
  • Handle: RePEc:eee:corfin:v:27:y:2014:i:c:p:133-156
    DOI: 10.1016/j.jcorpfin.2014.02.006
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    19. Viet Anh Dang, 2013. "Testing capital structure theories using error correction models: evidence from the UK, France and Germany," Applied Economics, Taylor & Francis Journals, vol. 45(2), pages 171-190, January.
    20. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Capital structure; Liquidity; Information asymmetry; Signaling;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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