alexa Leverage change, debt overhang, and stock prices
Social & Political Sciences

Social & Political Sciences

Journal of Civil & Legal Sciences

Author(s): Jie Cai, Zhe ZHANG

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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.

This article was published in Journal of Corporate Finance and referenced in Journal of Civil & Legal Sciences

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