Disentangling Sentiment from Cyclicality in Firm Capital Structure |
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Authors: | Haitham A Al-Zoubi Jennifer A O'Sullivan Aktham I Al-Maghyereh Brendan J Lambe |
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Institution: | 1. Alfaisal University, P.O. Box 50927, Riyadh, Saudi Arabia, 11533;2. The University of Southern Mississippi, 730 E. Beach Blvd. | Long Beach, MS, 39560;3. United Arab Emirates University, Ain, United Arab Emirates |
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Abstract: | This study examines the relationship between capital structure choices and investor and managerial sentiment, finding that periods of positive sentiment are associated with reduced leverage within firms. We focus on the cyclicality of leverage using non-orthogonalized sentiment indices and find a strong negative relationship. Leverage, therefore, appears countercyclical, implying that the decision to take on debt is a consequence of either Admati et al.'s (2018) ratchet effect or a managerial attempt to time the market. Our findings lead us to question some fundamental capital structure theories, namely, trade-off (Kraus and Litzenberger, 1973), and Hackbarth's (2008) managerial traits theory. Instead, we favour the idea that leverage is a consequence of countercyclical market timing behaviour. |
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Keywords: | Growth perception bias Market timing Managerial traits Pecking order theory Risk perception bias Trade-off theory |
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