Ambiguity of Financial Leverage Measures and Bondholder Protection

Noel Yahanpath, Eastern Institute of Technology
Rachel Williams, Eastern Institute of Technology

Abstract: In this paper, the authors examine whether the ambiguity of financial leverage measures undermines bondholder protection. The need for investors to know of the ambiguity associated with financial leverage measures is apparent in all of the finance company collapses. Thirty companies’ annual reports were examined and, information obtained shows, how financial leverage can vary according to the use of different indicators. Reasons for these variances are discussed.  In addition to this qualitative analysis, we have used the Spearman’s rank correlation coefficient to test whether there is any evidence to support our argument. The main finding of this paper is that there is no method of accurately discerning financial leverage, because of the measurement’s ambiguous nature, but there is a clear indication that this ambiguity has a negative impact on bondholder protection. There are many areas that can be ‘tweaked’ to a company’s advantage, leaving investors in the dark as to what the true situation is.