Do Firms Purposefully Change Capital Structure?: Evidence from a Growth Shock to Pharmaceutical Firms

Do firms make significant changes to capital structures over time? We use the passage of the Biologics Price Competition and Innovation Act as a shock to pharmaceutical firms' growth prospects, and study their subsequent capital structure changes. The biosimilar-opportunity led pharmaceutical firms to make their debt structures less constraining. Using a difference-in-difference approach, we show that pharmaceutical firms increased unsecured debt, shortened debt maturity, and reduced convertible debt. Additionally, new debt covenants were not more restrictive than old debt covenants, and leverage decreased for firms with high initial leverage. Results support the view that firms actively manage their debt structure.

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