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Leverage Risk in the Nonfinancial Corporate Sector

Mark B. Baribeau
Business Economics
Vol. 24, No. 3 (July 1989), pp. 34-39
Stable URL: http://www.jstor.org/stable/23485797
Page Count: 6
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Leverage Risk in the Nonfinancial Corporate Sector
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Abstract

Corporate America's reliance on debt financing in the 1980s has reached record postwar highs. This debt increase has not been linked to substantial purchases of physical assets or dividend payments to shareholders, but to corporate restructurings and massive equity retirements. Behind the debt-for-equity explosion are optimistic cash flow projections needed to meet steep interest payment obligations. Yet in spite of six years of economic expansion, cash flow has failed to keep pace with interest payments. Leverage risk in the nonfinancial corporate sector is rising and is high enough to cause above-average financial distress among firms should cash flow from current operations or asset sales be jeopardized during an economic downturn. Moreover, with aggregate debt servicing burdens so heavy, such financial distress could easily overflow into the real economy.

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