Capital structure and stock returns: Evidence from an emerging market with unique financing arrangements

We investigate capital structure dynamics in a unique financing environment where (1) we avoid the complex tax environments faced by previous studies and where (2) firms rely primarily on bank loans rather than the public debt market.

Consistent with recent empirical evidence, we find that stock returns are a first-order determinant of capital structure. Firms show some tendency to rebalance towards their target capital structure. However, the impact of stock returns dominates the effects of rebalancing. We also find that firm's stock returns induce some corporate issuing activity, and managers use issuing activity to counteract some of the mechanistic effects of stock returns.