On the irrelevance of the leverage effect

Peter Nippel

No 549, Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel from Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre

Abstract: Financial leverage increases the expected return on equity. We show that this leverage effect is not only irrelevant for shareholders' present wealth but also for the return on their investments. This result is straightforward if we do not only look at the return on equity but at the return on shareholders' total wealth. Any relevance leverage may have is definitely due to market imperfections. These may simply cause differences in market access for firms and individuals or lead to agency problems between investors and management.

Keywords: Leverage; shareholder value; shareholders' return (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauman:549

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