The Capital Structure Effect: How Debt Issuances Affect Value

Abstract

We analyse whether differences in leverage ratios and certain firm-specific and macro-specific factors affect short-term abnormal returns associated with debt issuances in accordance with the capital structure trade-off theory. Using a larger global sample of 23,911 debt issuances for the period 1990- 2024, we find evidence of a financial distress cost effect, partly confirming the trade-off theory. Furthermore, we also find value creation to be increasing with the tax rate, confirming a positive tax shield effect. We find this effect to be positively interacting with the relative size of the debt issuance, further confirming our results. The novel approach of using the event study framework to analyse capital structure improves upon traditional cross-sectional regressions by analysing the value creation at the inflexion point of capital structuring rather than at a random point in time. We do not find differences in growth opportunities, profitability, and firm size to influence value creation. This contrasts with the general results of cross-sectional studies that find that these variables predict capital structure. This suggests that variables that explain differences in value creation have yet to be uncovered.