Do Firms Purposefully Change Capital Structure? Evidence from an Investment-Opportunity Shock to Drug Firms

Erasmo Giambona, Joseph Golec, Florencio Lopez-De-Silanes

Research output: Contribution to journalArticle

Abstract

We study the capital structure changes of drug firms after an investment ]opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference ]in ]difference approach, we show that the shock led drug 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 and firms raised equity to preserve borrowing capacity. Our results support the view that firms actively manage their capital structures to bolster financial flexibility and increase debt capacity in response to new investment opportunities.

Original languageEnglish (US)
JournalJournal of Financial and Quantitative Analysis
DOIs
StateAccepted/In press - Jan 1 2020

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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