Investment　opportunity　shocks　may　either　force　firms　to　reduce　financial　leverage　to　alleviate　external　debt　constraints　and　maintain　a　flexible　financial　structure,　or　increase　financial　leverage　due　to　the　need　to　send　positive　signals　to　the　market.　We　analyze　this　deleveraging　puzzle　using　the　reform　of　the　Drug　Marketing　Authorization　Holder　(DMAH)　in　China　as　an　exogenous　shock.　We　find　that　DMAH　has　a　deleveraging　effect　on　drug　firms,　and　that　the　agency　cost　and　the　market　competition　are　the　two　key　paths　through　which　DMAH　affects　firms＇　financial　leverage.　Further　tests　show　that　the　deleveraging　effect　mainly　exists　in　non-SOEs,　firms　with　higher　financing　constraints　and　stronger　R&D　willingness.　Finally,　drug　firms　have　a　better　future　performance　by　reducing　their　financial　leverage.　This　paper　provides　insights　for　understanding　corporate　capital　structure　decisions　under　investment　opportunity　shocks.　©　2023　Elsevier　Inc.