Publication Type
Journal Article
Version
acceptedVersion
Publication Date
6-2011
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 that have higher leverage ratios, higher likelihood of default, and face more severe financial constraints. 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 change, Debt overhang, Capital structure
Discipline
Corporate Finance | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Corporate Finance
Volume
17
Issue
3
First Page
391
Last Page
402
ISSN
0929-1199
Identifier
10.1016/j.jcorpfin.2010.12.003
Publisher
Elsevier
Citation
CAI, Jie and ZHANG, Zhe.
Leverage change, debt overhang, and stock prices. (2011). Journal of Corporate Finance. 17, (3), 391-402.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3126
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/10.1016/j.jcorpfin.2010.12.003