Publication Type
Working Paper
Version
publishedVersion
Publication Date
10-2009
Abstract
We document a significant and negative effect of the change in a firm’s leverage ratio on its stock prices. We find that the negative effect is stronger for firms with a greater likelihood of debt overhang. Moreover, firms with an increase in leverage ratio tend to have less future investment. These findings are consistent with Myers' (1977) debt overhang theory that an increase in leverage may lead to future underinvestment, thus reducing a firm's value.
Keywords
Leverage, Debt overhang, Capital structure
Discipline
Corporate Finance | Portfolio and Security Analysis
Research Areas
Finance
First Page
1
Last Page
45
Identifier
10.2139/ssrn.1107878
Citation
CAI, Jie and ZHANG, Zhe.
Leverage change, debt overhang, and stock prices. (2009). 1-45.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3016
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.1107878