A recession will cause earnings to fall more rapidly for more highly financially leveraged firms.

Question

A recession will cause earnings to fall more rapidly for more highly financially leveraged firms.​

Quizplus · Accepted Answer

Highly financially leveraged firms have a higher debt-to-equity ratio, which means they have more debt than equity. During a recession, if their earnings fall, they may struggle to meet their debt obligations, leading to default, bankruptcy, or other financial distress. Therefore, highly financially leveraged firms are more vulnerable to the adverse effects of a recession.

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