Do Firms Purposefully Change Capital Structure? Evidence from an Investment-Opportunity Shock to Drug Firms

We study the capital structure changes of drug firms after an investment-opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference-in-difference approach, we show that the shock led drug firms to make their capital structures less constraining by decre...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2021-05, Vol.56 (3), p.915-944
Main Authors: Giambona, Erasmo, Golec, Joseph, Lopez-de-Silanes, Florencio
Format: Article
Language:English
Subjects:
Biological products
Capital
Capital investments
Capital structure
Companies
Corporate debt
Covenants
Debt
Drugs
FDA approval
Flexibility
Innovations
Investment
Investments
Maturity
Patient Protection & Affordable Care Act 2010-US
Pharmaceutical industry
Pharmaceuticals
Quantitative analysis
Short term debt
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Summary:We study the capital structure changes of drug firms after an investment-opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference-in-difference approach, we show that the shock led drug firms to make their capital structures less constraining by decreasing leverage, shortening debt maturity, increasing unsecured debt, and reducing convertible debt. New debt covenants became less restrictive and firms raised equity to preserve borrowing capacity. Our results support the view that firms actively manage their capital structures to bolster financial flexibility and increase debt capacity in response to new investment opportunities.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109020000095