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Thesis (M.A.)—University of Nebraska—Lincoln, 1968. Department of Business Organization and Management.


Copyright 1968, the author. Used by permission.


The purpose of this study is to examine the effects of leverage on the market price of common stock of commercial banks.The objective of this study is to attempt to identify investor preference among bank stocks which differ with respect to leverage risk and yield.This examination is justified on three bases: (1) the large amount of capital notes and debentures issued since the Comptroller of the Currency’s ruling in December 1962, (2) the development of a more complete theory of financial structure of commercial banks showing the relationships among risk, capital structure, and the cost of capital, and (3) to focus attention on the need for more adequate disclosure of information in the market of bank stocks.

In this study that relationship was shown to exist consistently for return on equity at book value, but only sometimes at market value.The banks with below average earnings-growth consistently showed that earnings-price yield increased with the increase in leverage, but the banks with above average earnings growth had the opposite relationship, where the results of the correlation analysis were significant.

The results of this study indicate that stocks of firms with above average earnings growth must be evaluated differently than those of firms with below average earnings growth.More emphasis must be placed on capital structure for the bank with below average earnings growth.The earnings per share is of primary importance for the investor of growth firms, even if it does require a higher leveraged capital structure to achieve the showing.

Advisor:Clifford M. Hicks