Differences in the magnitude of financial distress costs and volatility of cash flows across industries significantly impact the choice of leverage.

Question

Quizplus · Accepted Answer

This statement is true. Industries with higher financial distress costs and/or greater volatility in cash flows are more likely to choose lower leverage as a way to mitigate risk. On the other hand, industries with lower financial distress costs and/or more stable cash flows are more likely to choose higher leverage in order to maximize returns.

Differences in the Magnitude of Financial Distress Costs and Volatility