Corporate Finance

Firms that prefer high leverage typically are in markets that are well established and will continue to be there even in the event of an economic downturn. These markets have a stable pool of buyers, for example, real estate will always be in demand as people need homes, businesses need an area to operate, and manufacturing companies need warehouses to build their widget. These industries can use credit to ensure they are profitable with little fear of default due to the constant demand afforded by their market. It must be clear however a form that has utilized too much leverage can become weaker and not protect its market (Berk, DeMarzo, 2017, p. 574).

Firms that tend to have low leverage operate in markets that can easily be negatively affected by an economic downturn. These markets are more volatile and more likely to take a hit as they are easily replaced with another item or forgone entirely if the budget requires it. These companies must choose wisely when and if to use credit due to the volatility of their market. Many luxury brands have seen this and learned to spend less in preparation for a downturn knowing their core market will be unphased but will lose those who were lower-earning clients (Tsui, 2001).

Berk, DeMarzo (2017). Corporate Finance:  The Core (4th ed.).  Boston, MA: Pearson Learning Solutions.

Tsui, B., & Fine, J. (2001). Can luxury brands survive the downturn? Advertising Age, 72(8), 14. Retrieved  from http://search.ebscohost.com.saintleo.idm.oclc.org/login.aspx?direct=true&db=a9h&AN=    4110647&site=ehost-live