Has financial leverage gone too far?

Abstract

Corporate growth and how to finance it are issues fundamental to business strategy. Starting in the mid‐1960s, many firms issued bonds and borrowed heavily to fuel their growth. At the time, this method of creating capital offered numerous potential benefits, including improved returns to shareholders and lower average costs of capital. However, as the economy began to enter a volatile period of increased competition and skyrocketing interest rates, many firms began to feel the first symptoms of overindulgence in debt. Yet, despite these warning symptoms, the trend toward higher leverage and declining interest‐expense‐coverage ratios continued clear through the 1970s. Only with the financial crunch of the 1980s bringing the well‐publicized problems of Braniff, Chrysler, and International Harvester before us as cautionary tales, have corporate strategists begun to ask themselves: Has financial leverage gone too far?

Citation

Hergert, M.J. (1983), "Has financial leverage gone too far?", Planning Review, Vol. 11 No. 3, pp. 42-45. https://doi.org/10.1108/eb054024