The leverage–value relationship puzzle: An industry effects resolution

Studies of the relationship between leverage and firm value find no general conclusions—firm value effect of leverage seems to depend on firm growth opportunities. However, prior studies fail to control for industry leverage differences and we argue that financial markets examine firm leverage only relative to the leverage in its industry. This paper controls for industry leverage effects in estimating the leverage–value relationship and documents that, unlike prior literature; leverage has a negative relationship with value for both high and low growth US firms.