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Leverage
Author(s) -
Miller Merton H.
Publication year - 2005
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2005.020_1.x
Subject(s) - leverage (statistics) , debt , constructive , capital market , capital structure , corporate debt , business , economics , corporate finance , capital (architecture) , finance , process (computing) , archaeology , machine learning , computer science , history , operating system
In his 1990 Nobel Prize address, the “father of modern finance” begins by discussing the benefits of debt financing and hen goes on to discuss potential costs. Although certainly capable of excesses, private capital markets have self‐correcting mechanisms that limit corporate “overleveraging.” Contrary to popular perception, corporate leveraging does not increase risk for the economy as a whole, and the financial difficulties of highly leveraged companies involve “mainly private, not social costs.” (And provided the Chapter 11 process doesn't get in the way, debt often plays the socially constructive role of eliminating excess capacity.) Finally, regulations designed to reinforce capital markets' built‐in controls against overleveraging are generally not only unnecessary but positively harmful to the economy.