Ans. Yes, the authors concluded that firms had been using significantly higher level of debt from 1995 through 1999. According to the authors, the build-up of debt in the late 1990s raised concerns about the U.S. nonfinancial corporate sector’s health and vulnerability to economic downturns. It had been seen that, between 1995 and 1999 the outstanding debt of nonfinancial corporations rose a weighty 46 percent- a trend typified by last year’s increase of 12 percent. Viewed as a share of GDP, such debt had reached to an extraordinary height at that time. This rapid growth in corporate debt also advanced some questions about the financial health of the sector and indirectly, about the sensitivity of other sectors to economic troubles. This seemingly high level of debt had concerned some observers, who wandered whether it had made the nonfinancial corporate sector financially weak and vulnerable to economic downturns. Such concerns had gained credibility from the recent worsening of other gauges of corporate health, notably default rates and recovery rates on defaulted debts.
Question no. 02 (a). Has debt been rising relative to the level of market value of equity during the study period?
Ans. No, debt has not been rising relative to the level of market value of equity during the study period. To illuminate this statement, we can recall to what the authors have said about this. To show the relationship between borrowing and market value of equity, the authors have used the “leverage ratio”. Leverage can be thought of as the ratio of a corporation’s debt to its long run earning capacity. They have used a firm’s long-plus short term debt as a share of its stock market value to find out the leverage. Then to cumulate individual firm’s leverage ratios into a sector wide average, they weighted firms