More Debt More Leverage?

If the primary purpose of raising debt levels was to finance growth opportunities, then higher debt levels would signal greater post-payout returns on assets but contain no information about firm leverage. Using annual data in real terms for more than 5,400 public US non-financial firms from 1973 to 2021, we reject this hypothesis by showing that the return channel accounts for less than half of the variation in debt levels, with the leverage channel accounting for the remainder. The link between greater debt growth and higher leverage is particularly pronounced during accommodative monetary policy regimes