When the value of a firm is increasing, common stocks provide a substantial payoff to stock holders in the form of capital appreciation and at times dividend payments. Common stock holders thus have a leveraged investment in the value of the firm. Bond holders, however, have a de-levered investment in the value of a firm, as they do not get rewarded when firm value increases, but are still guaranteed payment when the stock price declines. Declining firm value impinges on bond holders only after the firm value has substantially decreased to.
