TY - JOUR
T1 - Disentangling Sentiment from Cyclicality in Firm Capital Structure
AU - Al-Zoubi, Haitham A.
AU - O'Sullivan, Jennifer A.
AU - Al-Maghyereh, Aktham I.
AU - Lambe, Brendan J.
N1 - Publisher Copyright:
© 2022 Accounting Foundation, The University of Sydney.
PY - 2023/6
Y1 - 2023/6
N2 - 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.
AB - 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.
KW - Growth perception bias
KW - Managerial traits
KW - Market timing
KW - Pecking order theory
KW - Risk perception bias
KW - Trade-off theory
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U2 - 10.1111/abac.12274
DO - 10.1111/abac.12274
M3 - Article
AN - SCOPUS:85142266002
SN - 0001-3072
VL - 59
SP - 570
EP - 605
JO - Abacus
JF - Abacus
IS - 2
ER -