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A firm facing debt overhang cannot issue new junior debt because default is likely. Moreover, more debt will make the problems of debt overhang worse not better. In addition, the firm's shareholders do not want to issue new stock because this forces shareholders to bear some of the losses that would have been borne by junior creditors.
The issue of equity, on the other hand, would signal some lack of confidence, or at least that the share is over-valued. An issue of equity may then lead to a drop in share price. (This does not however apply to high-tech industries where the issue of equity is preferable, due to the high cost of debt issue as assets are intangible. [4])
In particular, "the impact of market timing on leverage completely vanishes", with debt issued following equity financing during earlier hot equity periods. Further, the (standard version of) the hypothesis is said to be [3] somewhat incomplete as relates to theory. Beyond empirical study, as alluded to, a model is needed to explain why at the ...
“It took the U.S. around 220 years to issue $11 trillion of the national debt, but we’ve added $11 trillion of debt over the last ... The costs of higher debt are hidden as the economy keeps ...
For example, the debt-to-equity ratio and interest coverage ratios are supplemental ways to see how leveraged a company is. Remember that a high debt-to-assets ratio isn’t necessarily a bad thing.
This mounting debt, the CBO warned, “would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it ...
A higher debt-to-equity ratio leads to a higher required return on equity, because of the higher risk involved for equity-holders in a company with debt. The formula is derived from the theory of weighted average cost of capital (WACC).
Firms rationally invest and seek financing in a manner compatible with their growth types. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. Distinct growth types are persistent.