Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity |
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| Institution: | 1. WHU — Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany;2. Schulich School of Business, 99 Ian Macdonald Blvd., Toronto, ON, Canada;1. University of Birmingham Business School, Birmingham, UK;2. Richmond, The American International University in London, UK;3. University of Ghana Business School, Legon, Accra, Ghana |
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| 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 signaling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity. |
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