BRIAN KANTOR: When raising funds, why do companies lean towards risk?
It seems illogical that debt issuing is preferred to issuing equity
While issuing debt is more dangerous than issuing equity, it receives more encouragement from shareholders and regulators. Clearly debt has more upside potential. If a borrower can return more than the costs of funding the debt, return on equity improves, and there is less to be shared with fellow shareholders.
But clearly the upside comes with extra risks that shareholders bear should the transactions funded with debt turn sour. Any increase in the risk of default will reduce the value of the equity, perhaps significantly...