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

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  • Chong, Byung-Uk
  • Kim, Heonsoo

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.

Suggested Citation

  • Chong, Byung-Uk & Kim, Heonsoo, 2019. "Capital structure volatility, financial vulnerability, and stock returns: Evidence from Korean firms," Finance Research Letters, Elsevier, vol. 30(C), pages 318-326.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:318-326
    DOI: 10.1016/j.frl.2018.10.019
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    Cited by:

    1. Vuong, Giang Thi Huong & Nguyen, Phuc Van & Barky, Walid & Nguyen, Manh Huu, 2024. "Stock return volatility and financial distress: Moderating roles of ownership structure, managerial ability, and financial constraints," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 634-652.
    2. Hassan, Aminu & Ibrahim, Masud Usman & Bala, Ahmed Jinjiri, 2024. "Vulnerability of a developing stock market to openness: One-way return and volatility transmissions," International Review of Financial Analysis, Elsevier, vol. 93(C).

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    More about this item

    Keywords

    Asset pricing; Capital structure volatility; Financial vulnerability; Stock Market Anomaly;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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