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

Listed author(s):
  • Andres, Christian
  • Cumming, Douglas
  • Karabiber, Timur
  • Schweizer, Denis

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.

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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 27 (2014)
Issue (Month): C ()
Pages: 133-156

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Handle: RePEc:eee:corfin:v:27:y:2014:i:c:p:133-156
DOI: 10.1016/j.jcorpfin.2014.02.006
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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