Journal of Corporate Finance Vol. 42 2017
Options, equity risks, and the value of capital structure adjustments
Abstract
We use exchange-traded options to identify risks relevant to capital structure adjustments in firms. These forward-looking market-based risk measures provide significant explanatory power in predicting net leverage changes in excess of accounting data. They matter most during contractionary periods and for growth firms. We form market-based indices that capture firms' magnitudes of, and propensity for, net leverage increases. Firms with larger predicted leverage increases outperform firms with lower predicted increases by 3.1% to 3.9% per year in buy-and-hold abnormal returns. Finally, consistent with the quality, leverage, and distress risk puzzles, firms with lower predicted leverage increases are riskier but earn lower abnormal returns.
- DOI
- 10.1016/j.jcorpfin.2016.11.010
- Volume
- 42
- Pages
- 150-178
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib