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
Date Written: April 12, 2018
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: Suggested Citation