Finance assignment – corporate finance
This also means shareholders are at greater risk when they invest in companies that have higher levels of leverage. These firms could lose their profits and become unable to pay their debts. This can lead to a dramatic decrease in shareholder value.
Overall, the leverage effect describes how debt can influence both a firm’s expected return as well as its associated risk for shareholders. This information helps investors to make informed decisions about which companies they should invest or not so they maximize their returns and manage risk.