ABSTRACT This study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis. The alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments. Based upon the cross‐sectional implications of the tax shelter‐bankruptcy cost hypothesis, an alternative test of the irrelevance hypothesis is performed. The test examines the relationship between failure rates and leverage ratios for 36 lines of business. The results are inconsistent with the irrelevance hypothesis.

Richard P. Castanias II, Comment: Bhattacharya Paper, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 4, Proceedings of 14th Annual Conference of the Western Finance Association, June 21-23, 1979 (Nov., 1979), pp. 705-710

Richard P. Castanias, A Test of the OPEC Cartel Hypothesis, 1974-1983: Discussion, The Journal of Finance, Vol. 40, No. 3, Papers and Proceedings of the Forty-Third Annual Meeting American Finance Association, Dallas, Texas, December 28-30, 1984 (Jul., 1985), pp. 1006-1008

Robert M. Bowen, Richard P. Castanias, Lane A. Daley, Intra-Industry Effects of the Accident at Three Mile Island, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 1 (Mar., 1983), pp. 87-111