Leverage change, debt overhang, and stock prices
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.
Leverage, Debt overhang, Capital structure
Portfolio and Security Analysis
Cai, Jie and ZHANG, Zhe (Joe).
Leverage change, debt overhang, and stock prices. (2010). Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3016