Review of Financial Studies Vol. 8 No. 4 1995
The Capital Structure Puzzle Revisited
Abstract
[Corporate finance researchers have long been puzzled by low corporate debt ratios given debt's corporate tax advantage. This article recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a nongrowing stream of interest payments. Debt to value is therefore a distorted measure of corporate tax shielding. Even with very small debt-related costs, this may explain the observed magnitude and cross-sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the trade-off theory of capital structure.]
- Volume
- 8
- Issue
- 4
- Pages
- 1185-1208
- Sources
- bibtex:phds-export.bib