An Empirical Analysis of Capital Structure and Abnormal Returns

We study the relation between capital structure and abnormal returns. We show that a firm's industry matters. Abnormal returns decline in firm leverage. However, abnormal returns increase as the average industry leverage in a risk class increases. Separating the average level of external financing in an industry from that in a particular firm is important. We focus on industry characteristics. We show that firms in non-regulated and competitive industries with low concentration ratios exhibit this behaviour. In contrast, in the utilities risk class, abnormal returns increase in firm leverage. MM type empirical results are unique to the utilities sector.JEL classifications: G11, G32, L50