Abstract
Despite the common perception that levered firms are riskier, a review of empirical studies and past theoretical works is presented to discuss the hypotheses that i) corporate debt does not increase the overall risk of the firm; ii) corporate debt reduces the risk and return of equity; iii) equity investors can use corporate debt to lower their return and risk – hedging use of firm’s debt – or to increase their return and risk – speculative use of firm’s debt. Modigliani and Miller Proposition I is further confirmed under different assumptions while a different explanation of Proposition II formula is proposed.
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