FINANCIAL LEVERAGE AND ITS ECONOMIC IMPACT.
Keywords:
Financial leverage, corporate debt, firm growth, investment, capital structure, macroeconomic stability.Abstract
This study examines the economic implications of financial leverage by combining theoretical analysis with macro-level data on corporate debt. Drawing insights from both foundational theories and empirical studies, we explore how leverage influences firm investment behavior and broader economic dynamics. Using Federal Reserve and FRED datasets, we document a significant post-2008 rise in U.S. nonfinancial corporate debt, both in size and in credit risk, highlighting potential vulnerabilities. We find that high leverage levels can depress investment, amplify economic downturns, and expose firms to greater financial stress, especially when growth opportunities are limited. Our analysis reinforces the idea that while leverage can enhance returns under certain conditions, excessive debt undermines long-term corporate value and macroeconomic resilience. These findings underscore the importance of maintaining optimal capital structures and monitoring debt quality to safeguard economic stability.
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