Do Markets Anticipate Capital Structure Decisions? Feedback Effects in Equity Liquidity

51 Pages Posted: 27 Jun 2011 Last revised: 24 Nov 2014

See all articles by Christian Andres

Christian Andres

WHU - Otto Beisheim School of Management

Douglas J. Cumming

Florida Atlantic University

Timur Karabiber

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2012

Abstract

This paper uses a new perspective to analyze information obtained from capital structure decisions. Most previous studies either separately tested how firms adjust to leverage targets, or observed how financial policy changes convey information such as balance sheet items. However, we analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure the latter by using equity liquidity. The effect is based on the assumption that one of the main drivers of liquidity is the information asymmetry that exists between managers (insiders) and owners (outsiders). For our empirical analysis, we use an information asymmetry index based on six measures that capture trading activity, trading costs, and the price impact of order flow. Under the assumption of joint determination of leverage and liquidity, we find that expected increases in leverage (target leverage changes) decrease our information asymmetry index. This is consistent with the signalling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.

Keywords: Capital Structure, Leverage, Liquidity, Information Asymmetry, Signalling

JEL Classification: G14, G19, G32

Suggested Citation

Andres, Christian and Cumming, Douglas J. and Karabiber, Timur and Schweizer, Denis, Do Markets Anticipate Capital Structure Decisions? Feedback Effects in Equity Liquidity (December 16, 2012). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1873438 or http://dx.doi.org/10.2139/ssrn.1873438

Christian Andres

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Timur Karabiber

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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