Do Markets Anticipate Capital Structure Decisions? Feedback Effects in Equity Liquidity

54 Pages Posted: 18 Apr 2013

See all articles by Christian Andres

Christian Andres

WHU - Otto Beisheim School of Management

Douglas J. Cumming

Florida Atlantic University; Birmingham Business School; European Corporate Governance Institute (ECGI)

Timur Karabiber

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2013

Abstract

We analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure information asymmetry from equity liquidity through the use of an information asymmetry index that is based on six measures that capture trading activity, trading costs, and the price impact of order flow. Modeling the joint determination of leverage and liquidity, the data indicate that expected increases in leverage (target leverage changes) decrease the information asymmetry index. This is consistent with the signalling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.

Keywords: Capital Structure, Liquidity, Information Asymmetry, Signalling

JEL Classification: G14, G19, G32

Suggested Citation

Andres, Christian and Cumming, Douglas J. and Karabiber, Timur and Schweizer, Denis, Do Markets Anticipate Capital Structure Decisions? Feedback Effects in Equity Liquidity (April 18, 2013). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2253290

Christian Andres

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/douglas-cumming

Timur Karabiber

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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