Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

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This is because a firm with greater business risk is already exposed to more uncertainty and variability in its earnings, and adding more financial leverage (i.e. debt) can magnify the negative effects of that risk on the firm's profitability and financial stability. On the other hand, a firm with lower business risk may be able to tolerate more leverage because its earnings are more predictable and stable, reducing the potential downside of financial leverage.

Holding All Other Factors Constant, a Firm That Is Subject