Do Firms Purposefully Change Capital Structure?: Evidence from a Growth Shock to Pharmaceutical Firms

54 Pages Posted: 16 Oct 2012 Last revised: 21 Apr 2018

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Joseph H. Golec

University of Connecticut - Department of Finance

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Date Written: April 12, 2018

Abstract

Is capital structure stable? We study the capital structure changes of pharmaceutical firms after the growth opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference-in-difference approach, we show that the biosimilar growth opportunity led pharmaceutical firms to make their capital structures less constraining by decreasing leverage, shortening debt maturity, increasing unsecured debt, and reducing convertible debt. New debt covenants became less restrictive. Additionally, firms’ increased assets were mainly financed through equity. Our results support the view that firms actively manage their capital structures to bolster financial flexibility when experiencing growth opportunities.

Keywords: Growth prospects, growth opportunities, unsecured debt, short-term debt, debt maturity, convertible debt, leverage, debt composition, debt structure

JEL Classification: G31, G32

Suggested Citation

Giambona, Erasmo and Golec, Joseph and Lopez de Silanes, Florencio, Do Firms Purposefully Change Capital Structure?: Evidence from a Growth Shock to Pharmaceutical Firms (April 12, 2018). Available at SSRN: https://ssrn.com/abstract=2162376 or http://dx.doi.org/10.2139/ssrn.2162376

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
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Syracuse, NY 13244-2450
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315 443-4885 (Phone)

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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