A Research on Capital Structure Premium: a Case of the Global Financial Crisis

Equity works as a cushion among the sources of corporate capital. Equity absorbs external shocks and protects corporate value especially in case of general capital crunch or economic turmoil. This paper examines capital structure premium hypothesis: a firm with a better capital structure suffers less on the occasion of external shocks. Now we presume that lower levered firms have better capital structure considering that equity works as a cushion. We carry out an event study on the occasion of global economic crisis as of the end of 2008 using a data set made up of non-manufacturing firms from Korea Exchange. We confirm that lower levered firms suffer less in stock prices than higher levered firms. The leverage of higher levered firms is negatively and significantly correlated with their cumulative average abnormal returns, while the case of lower levered firms shows no significance. Finally, the leverage of higher levered firms has negative and significant explanatory power for their cumulative average abnormal returns, while the case of lower levered firms does not.