Downward Sloping Demand Curves for Stock and Leverage
ABSTRACT: This research
attempts to investigate the effect of downward sloping demand curves for stock
on firms’ financing decisions. For the same size of equity issuance, firms with
steeper slope of demand curves for their stocks experience a larger price drop
in their share price compare to their counterparts. As a consequence, firms
with a steeper slope of demand curves are less likely to issue equity and hence
they have higher leverage ratios. This research finds that the steeper the
slope of demand curve for firm’s stock, the higher the actual leverage of the
firm. Furthermore, firms with a steeper slope of demand curves have higher
target leverage ratios, signifying that these firms prefer debt to equity
financing in order to avoid the adverse price impact of equity issuance on
their share price.
Keywords: slope of demand
curves for stocks, leverage, financing decisions
Author: Liem Pei Fun
Journal Code: jpmanajemengg060002
Artikel Terkait :
Jp Manajemen gg 2006