Disentangling Sentiment from Cyclicality in Firm Capital Structure

Haitham A. Al-Zoubi, Jennifer A. O'Sullivan, Aktham I. Al-Maghyereh, Brendan J. Lambe

    Research output: Contribution to journalArticlepeer-review


    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.

    Original languageEnglish
    Pages (from-to)570-605
    Number of pages36
    Issue number2
    Publication statusPublished - Jun 2023


    • Growth perception bias
    • Managerial traits
    • Market timing
    • Pecking order theory
    • Risk perception bias
    • Trade-off theory

    ASJC Scopus subject areas

    • Accounting


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