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Leverage change, debt overhang, and stock prices
Journal article   Open access   Peer reviewed

Leverage change, debt overhang, and stock prices

Jie Cai and Zhe Zhang
Journal of corporate finance (Amsterdam, Netherlands), v 17(3), pp 391-402
2011
DOI: https://doi.org/10.1016/j.jcorpfin.2010.12.003
url
https://ink.library.smu.edu.sg/context/lkcsb_research/article/4015/viewcontent/SSRN_id1107878.pdfView
Published, Version of Record (VoR)CC BY-NC-ND V4.0,  Open

Abstract

Capital structure Debt overhang Leverage change
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.

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95 citations in Web of Science
104 citations in Scopus

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Web of Science research areas
Business, Finance
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