Leverage change, debt overhang, and stock prices
192 citations recorded by the source corpus.
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.
Subfields: Accounting, Strategy and Management
View Paper: https://www.semanticscholar.org/paper/72c44f0feffe99f69eb9cbf6b300b3ce089e5686
Citations in the corpus
- The effect of firm size on the leverage–performance relationship during the financial crisis of 2007–2009 (2015, unknown): “…relationship, such as that of Margaritis and Psillaki (2010), who show that financial leverage has a positive effect on firm performance, Cai and Zhang (2011), who show that a change in financial leverage is related to future operating performance, Xu (2012), who find that…”