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The Impact of Financial Leverage on Shareholders’ Systematic Risk

Sustainability, 2019-12, Vol.11 (23), p.6548 [Peer Reviewed Journal]

2019 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 2071-1050 ;EISSN: 2071-1050 ;DOI: 10.3390/su11236548

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  • Title:
    The Impact of Financial Leverage on Shareholders’ Systematic Risk
  • Author: Aharon, David Yechiam ; Yagil, Yossi
  • Subjects: Bankruptcy ; Capital budgeting ; Capital structure ; Corporate taxes ; Costs ; Decisions ; Economic crisis ; Equity ; Financial leverage ; International finance ; Mathematical models ; Parameter estimation ; Risk ; Stockholders ; Sustainability ; Taxation
  • Is Part Of: Sustainability, 2019-12, Vol.11 (23), p.6548
  • Description: This paper tests the degree to which a sustainable relationship exists between financial leverage and the systematic risk of shareholders under the following capital market imperfections: corporate and personal taxes as well as risky debt and bankruptcy costs. This beta-leverage relationship has not yet been examined empirically in prior studies nor compared with the theoretical parameter values implied by well-known formulations in the literature. Using data from publicly traded American industrial firms, we found that risky debt models, rather than their corresponding risk free debt models, are more sustainable and appropriate for describing the link between equity beta and financial leverage. Our findings imply that estimating betas or unlevering betas based on risk free debt models might lead to unsustainable and inaccurate estimates of key corporate parameters such as the cost of capital, and may consequently lead to inappropriate capital budgeting decisions. In this respect, the results of this study might have consequences to the recently growing area of sustainable finance in the sense that investment decisions made by different bodies and institutions in the country are more consistent with market imperfections that exist in the economy. In other words, our findings can be in line with a sustainable financial marketplace that contributes to the economic efficiency in the long run and can be related to social well-being.
  • Publisher: Basel: MDPI AG
  • Language: English
  • Identifier: ISSN: 2071-1050
    EISSN: 2071-1050
    DOI: 10.3390/su11236548
  • Source: Directory of Open Access Scholarly Resources (ROAD)
    GFMER Free Medical Journals
    ProQuest Central
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