Research Reports from the Department of Operations
Document Type
Report
Publication Date
11-1-1969
Abstract
This study examines the relationship between a company’s capital structure, specifically its debt-equity ratio, and the market value of its common stock. The hypothesis asserts that the market value follows an inverse U-shaped function of the debt-equity ratio. A cross-sectional stock valuation model provides empirical evidence supporting this claim. Theoretical arguments include: (a) Companies with no or low debt fail to capitalize on the benefits of low-cost debt, resulting in lower stock valuations; and (b) excessive debt increases financial risk and embedded interest costs, amplifying total risk and deterring investors, which in turn depresses stock value. The findings highlight the critical role of leveraging in optimizing stock market performance while balancing financial and business risks.
Keywords
Operations research, Stocks--Valuation, Debt-to-equity ratio
Publication Title
Technical Memorandums from the Department of Operations, School of Management, Case Western Reserve University
Issue
Technical memorandum no. 161
Rights
This work is in the public domain and may be freely downloaded for personal or academic use
Recommended Citation
Kuratani, Yoshiro; Bechtold, Joseph E.; and Mantel, Samuel J. Jr., "Stock Market Responses to Risks Associated with Various Levels of Financial Leverages" (1969). Research Reports from the Department of Operations. 563.
https://commons.case.edu/wsom-ops-reports/563