A Correlation Study Between Listed Companies’ Leverage Ratio And Stock Price Movements

A series of unprecedented large-scale injection and policies with guarantees introuble assets have been carried out by the governments of different countries, whichwas triggered by extraordinary loss and the continued threat of bank collapses of thewestern financial institutions, since the onset of the global financial crisis. On the basisof analysis throughout this economic crisis, overusing highly leveraged transaction andexcessive expansion of balance sheet could be considered as the main incentives of thisfinancial crisis. The connection between leverage ratio and share price of a listedcompany is not a new topic, as the former reflects the capital structure of thecorporation and the later demonstrates the actual value of the public company.Nevertheless, it has its significance both on theory and practices that a meta-analysispresenting the influence on share price which was coursed by leverage level could bedrawn, by virtue of the research about the connection between leverage ratio and shareprice, the analysis of practical data and the illustration of different leverage level ofdifferent state of business.The following essay would mainly discuss the correlation between leverage ratioand PE ratio in order to demonstrate the influence of share price and corporate valuewhich was led by the change of leverage ratio. Firstly, the hypothesis of capitalstructure and share-price effect would be analyzed. Secondly, the dissertation wouldanalyze the status quo of the small and medium-sized enterprises board listedcompanies’ leverage ratio and price-earnings ratio. The next part will put forward thehypothesis that there is a best leverage range existing in the market on the ground oftheoretical basis and real situation. Then, the leverage ratio’s influence on PE ratio willbe examined in accordance with the yield rate of small and medium enterprise boardlisted companies. Finally, the essay would illustrate the empirical results and proposesuggestions.In the empirical researches,371small and medium-sized enterprises board listedcompanies as representative samples of5,565documents from balanced panel data wasselected since the first season of2010to the third season of2013, which have beenevaluated in different modeling, and a clean trend graph of the effect of leverage ratioimpact the practical value of listed companies has been drawn. By means of analyzingthe empirical results, the conclusion could be represented as:1) The small and medium-sized enterprises board listed companies’ leverage ratio generally exhibitcurve correlation with price-earnings ratio. And the second-order coefficients are lessthan zero. This proves that an optimal interval of leverage ratio which makes theprice-earnings ratio remained at an ideal state does exist in the small andmedium-sized enterprises board listed companies.2) There is a great differencebetween the coefficients of the equation of quadratic regression in different industries.This shows that there are obvious differences of optimal leverage ratio betweendifferent industries listed companies. Furthermore, the development levels ofenterprises in different industries also have certain difference.