Capital structure volatility, financial vulnerability, and stock returns: Evidence from Korean firms

Byung-Uk Chong and Heonsoo Kim

Finance Research Letters, 2019, vol. 30, issue C, 318-326

Abstract: Using a large dataset of listed firms in Korea, we test whether volatility of capital structure affects stock returns in a systematic way. Stock returns of high capital-structure-volatility firms belonging to different size groups move together over time, suggesting the existence of a capital-structure-volatility factor. This factor earns a sizable, negative risk-premium of −1.08% on a monthly basis over the sample period spanning 2004–2017, and the factor return is adversely affected by deteriorating financial market conditions. Moreover, the cross-sectional relation between capital structure volatility and stock returns is also negative. Overall results indicate that the capital structure volatility may represent another pricing puzzle in stock markets.

Keywords: Asset pricing; Capital structure volatility; Financial vulnerability; Stock Market Anomaly (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:30:y:2019:i:c:p:318-326

DOI: 10.1016/j.frl.2018.10.019

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