This study investigates firms’ capital structure decisions around significant drops in stock price. We present evidence that firms usually repurchase equity to boost stock prices following these shocks, rather than retiring debt to rebalance their capital structures, even though buybacks cause their capital structures to deviate farther from the previous levels. Our results also show that firms that are less exposed to costs related to financial distress (e.g., those with high cash holdings or almost zero leverage) and those whose managers’ compensation depends heavily on stock returns are more likely to repurchase shares after stock price shocks than are other firms. These results indicate that managerial incentives and firms’ historical financial policies play more important roles in determining how firms react to stock price shocks than do managers’ desires to maintain optimal leverage.