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On the irrelevance of the leverage effect

Author

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  • Nippel, Peter

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.

Suggested Citation

  • Nippel, Peter, 2001. "On the irrelevance of the leverage effect," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 549, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    • Handle: RePEc:zbw:cauman:549
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    File URL: https://www.econstor.eu/bitstream/10419/111048/1/Manuskripte-549_leverage-effect.pdf
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    More about this item

    Keywords

    Leverage; shareholder value; shareholders' return;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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