Meaning of overlevered | Babel Free

Definitions

Having too much leverage.

not-comparable

Examples

“Once the “acceptable” amount of leverage has been passed, the rate of interest on debt will begin to rise and may cause the cost of capital for the overlevered firm to increase.”

“Before merger, bidders have significantly more financial slack than a large general sample of firms. Even without including cash as “negative debt,” bidders are found to be significantly less levered than a control sample. These findings are contrary to Melicher and Rush (1973), Mueller (1980), Shrieves and Pashley (1984), and Weston and Mansinghka (1971), all of which found bidders to be overlevered.”

“Our results also imply that offsetting the accumulated deviation from the target is not the primary reason for issuing or repurchasing equity. Equity repurchases follow periods of rising leverage deficit, but they fail to offset any significant portion of the accumulated deviation from the target. Equity issuers are underlevered rather than overlevered prior to the issue.”

“Some accountants might be trying to help their clients "look good." In the early 1980s, looking good generally meant having a low inventory due to the popularity of JIT. In the late 1990s it was quite different. Consider the famous accounting scandals associated with Arthur Andersen and its clients. Some firms may have been concerned about appearing overlevered. Inventory typically serves as collateral for debt. From this perspective having a higher inventory might help the firm look good to investors who were worried about being repaid.”

“This reasoning implies that when firms are below their target leverage ratios, they should be able to move toward their targets faster when the banking sector is competitive. Note, however, that bank competition is not likely to impact the leverage adjustment speeds of overlevered firms. Banks' incentives are to provide more loans, not fewer.”

“The act reduced the difference between the marginal effective tax rate on corporate and noncorporate investments by 3.5 percentage points (from 3.3 percent to -0.2) and reduced the difference in the marginal effective tax rate on equity- versus debt-financed corporate investments by 44.4 percentage points (from 57.8 percent to 13.4 percent) (CBO 2018b). These smaller tax differentials lowered incentives to engage in tax planning involving entity selection choices and reduced the benefit to debt financing over equity financing, lowering incentives for firms to be overlevered in ways that contribute to financial crises (De Mooij, Keen, and Orihara 2014).”

CEFR level