So what? It's just a change in capital structure. Most corporations are funded by a mix of equity and debt. On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
> On average, taking on some debt boosts shareholder returns despite the increased risk of bankruptcy.
Define "shareholder".
The day trader? The hedge fund who wants a position for a few weeks/months? The pension fund that would like regular cash flow? The person with a retirement account that is dollar cost averaging into the market over a period of decades?
On average having some level of debt boosts shareholder returns. It does increase the risk of bankruptcy, but usually it's a net win. Smart shareholders are diversified so that the bankruptcy of any single company in their portfolio has minimal impact.
More interesting that debt to equity ratio, is what is done with the capital that is raised by either mechanism. Is it possible for investment into operations, marketing or strategic expansion or reduction to improve shareholder returns? Does CEO compensation that is well into the hundred million dollar range for performance that isn’t remarkable typically boost shareholder returns? These are questions that I think are more interesting to people running and governing companies. Even to CFOs which all know in their sleep the first year MBA financial engineering tricks of CAPM, WACC, and leverage to determine optimal capital structure.
The attitude conveyed in your last sentence should be a large red flog to a competent and attentive Board or share holder. First, it is of no concern to the management how much I am or am not diversified- management’s job is to optimally run a company, not my portfolio. Second, leveraging up a compsny in low interest rate times is likely largely increases systemic risk to the share holders which, according to Markowitz’s modern portfolio theory, is not reduced by diversification versus idiosyncratic risk, which is.
Define "shareholder".
The day trader? The hedge fund who wants a position for a few weeks/months? The pension fund that would like regular cash flow? The person with a retirement account that is dollar cost averaging into the market over a period of decades?
See "investor heterogeneity".