Title

Leverage change, debt overhang, and stock prices

Publication Type

Journal Article

Publication Date

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