Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
2007 Annual International CHRIE Conference & Exposition 
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explanation for the positive impact of leverage on financial performance (Campello, 2006). When a risky venture is 
financed by debt, profits will go to equity holders if the venture is successful, but debt holders have to sustain the 
loss if the venture fails. Therefore, through debt financing, the risk of the venture is shifted from equity holders to 
debt holders. Such risk shifting aligns the interests of shareholders and managers and provides incentives for the 
firm to use debt financing to increase production for gaining an advantage over their industry rivals. As a result, 
higher leverage could create better financial performance.