The impact of financial leverage on shareholders' systematic risk

David Yechiam Aharon, Yossi Yagil

Research output: Contribution to journalArticlepeer-review


This paper tests the degree to which a sustainable relationship exists between financial leverage and the systematic risk of shareholders under the following capital market imperfections: corporate and personal taxes as well as risky debt and bankruptcy costs. This beta-leverage relationship has not yet been examined empirically in prior studies nor compared with the theoretical parameter values implied by well-known formulations in the literature. Using data from publicly traded American industrial firms, we found that risky debt models, rather than their corresponding risk free debt models, are more sustainable and appropriate for describing the link between equity beta and financial leverage. Our findings imply that estimating betas or unlevering betas based on risk free debt models might lead to unsustainable and inaccurate estimates of key corporate parameters such as the cost of capital, and may consequently lead to inappropriate capital budgeting decisions. In this respect, the results of this study might have consequences to the recently growing area of sustainable finance in the sense that investment decisions made by different bodies and institutions in the country are more consistent with market imperfections that exist in the economy. In other words, our findings can be in line with a sustainable financial marketplace that contributes to the economic efficiency in the long run and can be related to social well-being.

Original languageEnglish
Article number6548
JournalSustainability (Switzerland)
Issue number23
StatePublished - 1 Dec 2019

Bibliographical note

Publisher Copyright:
© 2019 by the authors. Licensee MDPI, Basel, Switzerland.


  • Equity risk
  • Financial leverage
  • Market imperfections
  • Sustainable finance
  • Unlevered beta

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Renewable Energy, Sustainability and the Environment
  • Environmental Science (miscellaneous)
  • Energy Engineering and Power Technology
  • Management, Monitoring, Policy and Law


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