Compelling empirical evidence documenting a material effect of corporate taxes on leverage decisions is limited, in part because of difficulties in constructing an effective proxy for the firm's tax benefit of debt. We examine leverage decisions across taxable and nontaxable real estate firms—firms for which we can measure the relative tax benefit of debt with little error. The tax hypothesis implies that for firms with similar asset portfolios, taxable firms should have more debt than their nontaxable counterparts. Consistent with this, leverage ratios of taxable real estate firms are higher than their nontaxable counterparts, but the magnitude of this difference is at most one-half of that implied by studies that employ simulated marginal tax rates.

We examine theories of leverage and debt maturity, focusing on the impact of firms' investment opportunity sets and regulatory environments in determining these policies. Using results on strategic complementarities, we identify sufficient conditions for the theory to have testable implications for reduced-form and structural-equation regression coefficients. Obtaining testable implications for structural equations requires less from the theory but more from the data than the reduced-form specification because it requires an instrumental-variables approach. We examine this trade-off between theory and statistical methods and provide tests using two decades of data for over 5000 industrial firms.

This paper examines change in property-liability insurers' risk-taking around enactments of state guaranty fund laws. Our evidence suggests that the risk of insurers' asset portfolios increases following enactments. But this increase in risk is significant only for stock insurers. Our evidence of increased risk-taking following guaranty-fund adoptions suggests that the way these funds are organized creates counterproductive investment incentives, especially for stock companies. Because these laws were enacted by states over the period 1969–1981, our evidence on changes in risk-taking helps resolve statistical problems that have been troublesome for studies of bank deposit insurance.

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distre ss, or other agency costs. This paper provides evidence on these hypothe ses using survey data on firms' use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 16 9 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedgin g substitutes.

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper provides evidence on these hypotheses using survey data on firm's use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 169 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedging substitutes.

Merton Miller, winner of the 1990 Noble Prize for Economics, is the Robert R. McCormick Distinguished Service Professor in the Graduate School of Business at the University of Chicago.

John A. Bishop, John P. Formby, W. James Smith, Lorenz Dominance and Welfare: Changes in the U.S. Distribution of Income, 1967-1986, The Review of Economics and Statistics, Vol. 73, No. 1 (Feb., 1991), pp. 134-139