Lambrinoudakis, C, Skiadopoulos, G and Gkionis, K (2019) Capital structure and financial flexibility: Expectations of future shocks. Journal of Banking and Finance, 104. pp. 1-18. ISSN 0378-4266
Abstract
We test one of the main predictions of the financial flexibility paradigm, that expectations about future firm-specific investment shocks affect the firm's leverage. We extract the expectations of small and large future shocks from the market prices of equity options. We find that leverage decreases when expectations for any one of the two types of future shocks increase and the relation is statistically significant even when we control for standard determinants of leverage and the firm's probability of default. Expectations for future shocks explain a greater fraction of leverage variation than most standard determinants of leverage do and they affect more the small and financially constrained firms. Our results are not subject to an endogeneity bias and they confirm DeAngelo et al. (2011) model's predictions and the evidence that managers seek for financial flexibility.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2019, Elsevier Ltd. All rights reserved. This is an author produced version of a paper published in Journal of Banking and Finance. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Capital structure; Financial flexibility; Options; Risk-neutral volatility; Risk-neutral kurtosis |
Dates: |
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Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Accounting & Finance Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 12 Apr 2019 13:45 |
Last Modified: | 14 Dec 2023 14:41 |
Status: | Published |
Publisher: | Elsevier |
Identification Number: | 10.1016/j.jbankfin.2019.03.016 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:144898 |
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