Analysis of the Financial Leverage Effect in the Context of Interest Rates Increase

Abstract

The main objective of this paper is to demonstrate the importance of a tool, called in the specialized literature, financial leverage effect, in managerial decision-making process, regarding the way to finance the assets and finding an optimal indebtedness. The research context comes as a result of the recently increase in the inflation rate, at global, European and national level. This fact led the national central banks to revise their monetary policies, mainly through the monetary policy increases interest rate. As a consequence, the commercial banks (which borrow money from the Central or National Bank) grant more expensive loans to commercial companies. Theoretical research on the conceptual approach is complemented by the case study method, whose results show that an increase in the interest rate on loans contracted by the companies, can lead to a decrease in the financial leverage effect value, until reaching even negative values.