Abstract
- This paper traces the relationship between the capital structure and stock returns of the U.S. publicly traded companies from 2007 to 2012. It supports the notion that stock returns are a first-order determinant of debt ratio dynamics. The evidence suggests that proxies such as tax costs, expected bankruptcy costs, earnings, profitability, market-book ratios, or the exploitation of undervaluation do not fully explain leverage ratios. This paper proxies the corporate debt ratio using stock returns and stock returns-adjusted historical debt ratios as the most suitable variables forecasting market-based capital structure. The prior research in this field, conducted before the Global Financial Crisis of 2008, indicated a strong association between logged stock returns and capital structure corresponding to the reluctance of companies to undo the effects of stock prices. Consequently debt-equity ratios vary accordingly to share price fluctuations. The present study aims to test the hypothesis of stock returns effects in the new financial and economic landscape.