Leverage Ratios, Industry Norms, and Stock Price Reaction : An Empirical Investigation of Stock-for-Debt Transactions

In this paper, I extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm. I find that announcement-period stock returns for firms moving quot;away fromquot; industry debt-to-equity norms are significantly more negative than returns for firms moving quot;closer toquot; these norms. This finding is consistent with optimal capital structure theory if industry debt-to-equity norms are reasonable approximations of wealth-maximizing leverage ratios