Why might firms in specific industries prefer more debt financing?

Firms in specific industries often prefer more debt financing primarily to take advantage of interest tax shields. When companies incur debt, the interest payments on that debt are typically tax-deductible, which reduces the overall tax burden of the firm. This tax benefit effectively lowers the cost of borrowing and can enhance the firm's cash flow, thereby providing an incentive for businesses to use debt as a financing option.

Industries that are stable and predictable in terms of cash flows, such as utilities or real estate, can benefit significantly from debt financing because they can meet the fixed interest payments without incurring excessive risk. This is particularly attractive compared to equity financing, which does not provide a similar tax advantage.

While diversification and minimizing operational risk are relevant factors for business strategy, they do not directly relate to the tax benefits associated with debt financing. Additionally, decreasing shareholder equity is generally not a goal; firms usually want to maintain or grow equity value. Therefore, the strong tax incentive to lower effective borrowing costs through debt is the primary reason firms in certain industries may prefer debt over other forms of financing.