Lambrinoudakis, Costas Neumann, Michael Skiadopoulos, George
Year of Publication:
Working Paper, School of Economics and Finance, Queen Mary, University of London 731
We test one of the main predictions of the financial flexibility paradigm that expectations about future firm-specific shocks affect the firm's leverage. We extract the expectations of small and large future shocks from the market prices of equity options. We find that expectations for future shocks decrease leverage and are statistically significant even when we control for traditional determinants. Moreover, they have a first-order effect to capital structure decisions affecting more the small and financially constrained firms. Our findings confirm the De Angelo et al. (2011) model predictions and evidence drawn from surveys that managers seek for financial flexibility.
Capital structure Financial flexibility Options Risk-neutral volatility Risk-neutral kurtosis