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Leverage

Author

Listed:
  • Merton H. Miller

Abstract

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.

Suggested Citation

  • Merton H. Miller, 2005. "Leverage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(1), pages 106-111, January.
    • Handle: RePEc:bla:jacrfn:v:17:y:2005:i:1:p:106-111
    DOI: 10.1111/j.1745-6622.2005.020_1.x
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    2. Lim, Steve C. & Mann, Steven C. & Mihov, Vassil T., 2017. "Do operating leases expand credit capacity? Evidence from borrowing costs and credit ratings," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 100-114.
    3. Drees, Burkhard & Eckwert, Bernhard, 2000. "Leverage and the price volatility of equity shares in equilibrium," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(2), pages 155-167.
    4. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    5. Hal Varian, 1993. "A Portfolio of Nobel Laureates: Markowitz, Miller and Sharpe," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 159-169, Winter.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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