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Definition of Leverage. action of a lever; mechanical power supplied by a lever; influence, ability to affect or alter people or circumstances; use of borrowed money to increase the return on an investment. use one's influence to affect people or circumstances; increase the return on an investment by using borrowed money.
Therefore, corporate management has an obligation to use a thorough and prudent process for establishing a companyâs target capital structure. The capital structure is how a firm finances its operations and growth by using different sources of funds. Empirical Use of Financial Leverage. Financial leverage is defined as the extent to which fixed-income securities and preferred stock are used in a companyâs capital structure. Financial leverage has value due to the interest tax shield that is afforded by the U.S. corporate income tax law.