Leverage Change, Debt Overhang, and Stock Prices

Chenchuramaiah T. Bathala

doi:10.2469/dig.v41.n3.18

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009990081 ◽

2009 ◽

Vol 44 (3) ◽

pp. 551-578 ◽

Cited By ~ 9

Author(s):

Alexei V. Ovtchinnikov ◽

John J. McConnell

Keyword(s):

Capital Markets ◽

Stock Prices ◽

Financial Distress ◽

Stock Price ◽

Debt Overhang ◽

Capital Market Imperfections ◽

Investment Opportunities ◽

Imperfect Capital Markets ◽

Empirical Tests ◽

External Equity

AbstractPrior studies argue that investment by undervalued firms that require external equity is particularly sensitive to stock prices in irrational capital markets. We present a model in which investment can appear to be more sensitive to stock prices when capital markets are rational, but subject to imperfections such as debt overhang, information asymmetries, and financial distress costs. Our empirical tests support the rational (but imperfect) capital markets view. Specifically, investment–stock price sensitivity is related to firm leverage, financial slack, and probability of financial distress, but is not related to proxies for firm undervaluation. Because, in our model, stock prices reflect the net present values (NPVs) of investment opportunities, our results are consistent with rational capital markets improving the allocation of capital by channeling more funds to firms with positive NPV projects.

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Leverage change, debt overhang, and stock prices

Journal of Corporate Finance ◽

10.1016/j.jcorpfin.2010.12.003 ◽

2011 ◽

Vol 17 (3) ◽

pp. 391-402 ◽

Cited By ~ 56

Author(s):

Jie Cai ◽

Zhe Zhang

Keyword(s):

Stock Prices ◽

Debt Overhang

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The Effect of Current Ratio and Debt to Asset Ratio on Net Profit Margin and Stock Prices: A Study of Basic Industry and Chemicals Companies

International Journal of Scientific Research in Science and Technology ◽

10.32628/ijsrst207561 ◽

2020 ◽

pp. 282-294

Author(s):

Sudirman S ◽

Muhammad Wahyuddin Abdullah ◽

Muhammad Obie

Keyword(s):

Stock Prices ◽

Stock Exchange ◽

Secondary Data ◽

Profit Margin ◽

Current Ratio ◽

Industry Sector ◽

Basic Industry ◽

Net Profit ◽

Equity Ratio ◽

Index Value

This study examined the effect of current ratio and debt to asset ratio on net profit margin and stock prices of the sector basic industry and chemicals companies listed on the Indonesia Stock Exchange in the period 2015-2019. The object of research was the stock prices of companies in the Basic Industry and Chemicals sector, which have been published through the official website of the Indonesian capital market. It was used secondary data derived from the monthly statistics, including Current Ratio data, Net Profit Margin, Debt to Asset Ratio, and data on closing prices for the period 2015-2019. In analyzing data, it was used path analysis of secondary data obtained from the basic industry sector financial statements of 60 companies. The company's performance in this sector is considered quite good when seen from the movement of the index value in the last five years. The results show that direct current ratio had a positive and significant effect on the net profit margin, and the debt to equity ratio did not significantly influence the net profit margin. The current ratio has a positive and significant effect on stock prices, and the debt to equity ratio has a negative and not significant effect on stock prices. In contrast, the net profit margin has a significant effect on stock prices in the basic industry sector companies on the Indonesia Stock Exchange. Indirectly the current ratio has a positive and significant effect on stock prices. In contrast, the debt to asset ratio has a negative and not significant effect on the company's stock prices in the basic industry sector on the Indonesia Stock Exchange.

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An Empirical Investigation of Factors Affecting Stock Prices in Vietnam

Journal of Economics and Development ◽

10.33301/2014.16.01.05 ◽

2014 ◽

pp. 74-89 ◽

Cited By ~ 1

Author(s):

Vinh Vo Xuan

Keyword(s):

Exchange Rates ◽

Crude Oil ◽

Foreign Exchange ◽

Stock Prices ◽

Global Financial Crisis ◽

Oil Prices ◽

Foreign Exchange Rates ◽

Factors Affecting ◽

Crude Oil Prices ◽

Before And After

This paper investigates factors affecting Vietnam’s stock prices including US stock prices, foreign exchange rates, gold prices and crude oil prices. Using the daily data from 2005 to 2012, the results indicate that Vietnam’s stock prices are influenced by crude oil prices. In addition, Vietnam’s stock prices are also affected significantly by US stock prices, and foreign exchange rates over the period before the 2008 Global Financial Crisis. There is evidence that Vietnam’s stock prices are highly correlated with US stock prices, foreign exchange rates and gold prices for the same period. Furthermore, Vietnam’s stock prices were cointegrated with US stock prices both before and after the crisis, and with foreign exchange rates, gold prices and crude oil prices only during and after the crisis.

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