Stock Return Volatility and Capital Structure Decisions

42 Pages Posted: 29 Oct 2013 Last revised: 19 Feb 2016

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Hao Wang

Tsinghua University

Hao Zhou

SUSTech Business School; Tsinghua University - PBC School of Finance

Date Written: January 5, 2014

Abstract

Stock return volatility significantly predicts active leverage adjustment, consistent with the trade-off theory. Firms respond asymmetrically to rising volatility instead of falling volatility, more with debt reduction than equity issuance. The forecasting power of stock return volatility mostly resides on surprise (idiosyncratic) volatility, as a proxy for uncertainty; while the forecasting power of expected (systematic) volatility is largely subsumed by those of firm fundamentals and market information. Falling earning growth appears to be the channel through which increasing volatility predicts leverage reduction and investment contraction.

Keywords: Stock Return Volatility, Leverage Ratio, Surprise Shocks, Idiosyncratic Volatility, Uncertainty

JEL Classification: G32, G17

Suggested Citation

Chen, Hui and Wang, Hao and Zhou, Hao, Stock Return Volatility and Capital Structure Decisions (January 5, 2014). PBCSF-NIFR Research Paper No. 13-04, Available at SSRN: https://ssrn.com/abstract=2346642 or http://dx.doi.org/10.2139/ssrn.2346642

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
617-324-3896 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hao Wang

Tsinghua University ( email )

318 Weilun Building
Tsinghua University
Beijing, 100084
China
86 10 62797482 (Phone)
86 10 62794554 (Fax)

Hao Zhou (Contact Author)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong
China
+86-0755-88010464 (Phone)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

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