Event study on changes in capital structure and volatility

Abstract

The authors of this paper test whether the changes in the capital structure and more specifically the changes in Debt to Equity ratio can explain the changes in the implied volatility and realized volatility. In addition, the effect of changes in leverage on stock returns and volume trading was researched. This was done by performing an event study in a selection of 24 companies from the US market. The results of the empirical analysis suggest that the market has higher explanatory power than the changes in the leverage for the selection of stocks. Changes in leverage can explain the changes in stock’s return, while the average volume trade over a 5-day period before and after the investigated events could not be explained by changes in the leverage.