Title

Leverage change, debt overhang, and stock prices

Publication Type

Working Paper

Publication Date

10-2010

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

Portfolio and Security Analysis

Research Areas

Finance