What can lead an industry to favor more debt financing?

The preference for more debt financing within an industry can be strongly influenced by the presence of identifiable, tangible assets. Tangible assets such as real estate, machinery, and equipment provide collateral that lenders can use to secure loans. This collateral reduces the risk for lenders, making them more willing to provide debt financing. Firms in industries with substantial tangible assets can leverage this to obtain favorable borrowing terms, which can lead to a higher use of debt in their capital structure.

In contrast, industries with high levels of intangible assets may face challenges in obtaining debt financing because these assets are harder to value and liquidate in case of default. Limited external financing options could constrain a firm’s choices but would not inherently favor debt over equity. Similarly, lower potential growth rates don’t direct firms toward debt financing; instead, they may lead firms to be cautious about taking on additional debt, preferring instead to use equity or retain earnings to fund operations.