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This study investigates whether the firms lower their debt ratios after they experience negative stock return shocks. The relation between stock returns and firms’ leverage is one of the most interesting research topics for a long time. Welch (2004) report that a mechanistic effect of stock returns on leverage mainly caused by market capitalization changes and he also concludes that there are few counteracts to adjust leverage against the stock returns. The mechanistic effect predicts that reduced amounts of equity make firms’ debt ratios higher when negative stock returns occur. In addition to the mechanistic effect, market timing theory also predicts the negative relation between stock prices and debt ratios that firms prefer to issue equity when their stock prices are high. However, we can easily observe that managers try to cut down their liability when they are in crisis and stock returns poorly perform. This study finds indirect channels that negative stock returns make firms’ leverage decreased. We report that managers decrease firms’ leverage because of diminished amounts of financial deficits and increased financial distress costs by negative stock return shocks.