The Level of Leverage in Quoted Companies and Its Relation to Various Economic Factors

The accepted index of an economy’s macroeconomic and financial stability is the extent of leverage among firms in the private sector or, in other words, the scope of activity that is financed by liabilities other than internal sources. This study examines the trend in leverage among publicly-traded companies in Israel for the period 1995–2006 and the relative importance of various factors in explaining it. The data are taken from the quarterly financial statements. The findings are as follows: *Publicly traded companies preferred to finance their activity through debt and this tendency became more pronounced during the sample period. Thus, average leverage (defined as a firm’s ratio of liabilities to balance sheet assets) rose from about 55 percent in 1995 to about 65 percent in 2006. *Publicly traded companies chose to increase their leverage primarily by issuing bonds on the Tel Aviv Stock Exchange. The financial reforms, whose implementation accelerated at the beginning of the decade, enhanced nonbank financial intermediation in the provision of credit to the business sector and encouraged the growth in bond issues. *The rate of leverage was characterized by significant variation between firms according to industry. For example, real estate companies used debt to finance their activity to a much greater extent than the average for all industries while investment and commercial companies chose a level of debt that was somewhat higher than average. *A set of ten variables, out of a group of more than thirty that were chosen, was found to be significant in explaining the variation in rate of leverage between firms. Thus, for example, it was found that larger, more stable and faster-growing firms chose a higher rate of leverage while firms with high operating profit tended to preserve their profit and thus increase their internal sources of financing and reduce their rate of leverage.