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

Published online by Cambridge University Press:  09 March 2020

Erasmo Giambona ,
Joseph Golec Open the ORCID record for Joseph Golec [Opens in a new window]  and
Florencio Lopez-de-Silanes
Erasmo Giambona
Affiliation:
Giambona, egiambon@syr.edu, Syracuse University
Joseph Golec*
Affiliation:
Golec, jgolec@business.uconn.edu, University of Connecticut
Florencio Lopez-de-Silanes
Affiliation:
Lopez-de-Silanes, florencio.lopezdesilanes@skema.edu, SKEMA Business School, University Cote d’Azur, and NBER
*
Golec (corresponding author), jgolec@business.uconn.edu
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 915 - 944
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2020

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Footnotes

*

We are thankful for comments from Jason Berkowitz, Murillo Campello, Fousseni Chabi-Yo, James Choi, Martijn Cremers, Morris Davis, Harry DeAngelo, Rajna Gibson, Oliver Hart, Avraham Kamara (the referee), Rafael La Porta, Mark Leary, Andrew MacKinlay, Paul Malatesta (the editor), Jens Martin, Rafael Matta, Antonio Mello, Alan Moreira, Justin Murfin, Enrico Perotti, Gordon Phillips, Erwan Quintin, Tim Riddiough, Zach Sautner, Olivier Scaillet, Berk Sensoy, Andrei Shleifer, René Stulz, Amir Sufi, Jake Thomas, Heather Tookes, and John Wald. We also thank participants at the seminar series at NOVA Business School, Ohio State University, the University of Amsterdam, the University of Bologna, the University of Palermo, the University of Geneva, the University of Piraeus, the University of Southern California, the University of Wisconsin–Madison, Yale University, and participants at the 2013 Financial Intermediation Research Society meetings and the 2013 Western Finance Association meetings. We also acknowledge insightful discussions with industry experts at public firms including Joe Cook, Ted Buckley, John Doyle, Kim Larkins, Dorothy Hoffman, Daniyal Hussain, Richard Markus, John Pisnanont, and Scott Shortenhaus. Ye Wang provided excellent research assistance.

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