Pamela P. Peterson, Gary A. Benesh, A Reexamination of the Empirical Relationship Between Investment and Financing Decisions, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 439-453

Prevailing theories in finance and economics suggest that leases and debt are substitutes; an increase in one should led to a compensating decrease in the other. In particular, there are three views on the magnitude of the substitution coefficient. Standard finance theory treats cash flows from lease obligations as equivalent to debt cash flows, thus describing the tradeoff between debt and leases as one‐to‐one. Others are willing to use a tradeoff of leases for debt which is less than, but close to, one. The rationale for a dollar of leases using less of debt capacity than a dollar of debt obligation is based upon the differences in the terms and nature of lease and debt contracts. Finally, there are some who argue that since leased assets may be firm‐specific, the risk of moral hazard may be great, resulting in a tradeoff of greater than one‐to‐one; that is, a dollar of a lease obligation uses more of debt capacity than a dollar of a debt obligation. A series of empirical tests are performed in this study on samples of approximately 600 firms, covering the years 1976 through 1981, with none of the three views supported by the results. Instead, the results indicate that leases and debt are complements; greater use of debt is associated with a greater use of leasing. This finding reappears consistently for each year, each definition of leverage ratios, and each approach to analysis. This complementary relationship persists even after refinements are made to the estimation technique.

Part 1 Introduction: introduction to financial management and analysis. Part 2 Fundamentals of financial analysis: securities and markets accounting, taxation and cash flows financial analysis. Part 3 Fundamentals of valuation: mathematics of finance asset valuation and returns expected return of risk. Part 4 Financial management of investments: capital investment decisions evaluation techniques for capital projects capital budgeting and risk. Part 5 Financial management of investments: common and preferred stock long-term debt capital structure. Part 6 Financial management of financing: short-term assets short-term financing. Part 7 Financial management of working capital: strategy and financial planning. Part 8 Appendices: keeping up with securities' prices financial mathematics tables calculator applications statistical primer glossary brief solutions to end-of-chapter problems.

The relationship between heterogeneous expectations on the part of investors with respect to a security's future return and asset prices is an area of increasing interest in finance. Theoretical examples include Miller [14], Williams [23], and Jarrow [8]. Empirical examples include Bart and Masse [1] and Peterson and Peterson [18]. Miller, Bart and Masse, and Peterson and Peterson address issues related to whether an increase in divergence of opinion will lead to an increase in an asset's price. Unfortunately, little is known of how different types of changes in investors' probability distributions of returns influence asset returns. An even more basic problem is that it is not clear what is meant in terms of investor probability distributions when it is said that divergence of opinion increases or decreases. The answer to this problem has important implications for understanding equilibrium price.

The Capital Purchase Program (CPP) was intended to enhance capital and preserve lending capacity of banks, but the role of this program in affecting the risk of participating banks has been unresolved. We address this issue by investigating the market’s long-term perception of risk for financial institutions participating in the CPP. Leading up to and including the crisis, the systematic and idiosyncratic variances of the stock returns of all financial firms increased; following CPP, the relative idiosyncratic risk of CPP participants remained higher than for those not participating in CPP for four years following CPP.

This study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable (industrial development and pollution control) and taxable corporate bonds. This procedure is shown to produce matched bond pairs that are comparable. Two hundred pairs of bonds are examined from the second quarter of 1973 through the second quarter of 1983. Testing of the marginal tax rate relationships indicates that the marginal personal tax rate is less than the corporate statutory tax rate.

Miller and Scholes (1978) hypothesize that the marginal tax rate on dividend income may be less than the marginal rate of tax on capital gains. Their hypothesis is dependent upon individuals utilizing existing provisions of the Code which serve to reduce the taxation of dividends. In this study, estimates of the marginal and effective rates of tax on dividend income for the year 1979 are presented using the Statistics of Income sample of returns. The average marginal rate of tax on dividend income is estimated to be 40%, while the average effective rate of tax is estimated to be 30%.