A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.
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Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more leveraged firm in the industry charging higher prices on average. Notable exceptions exist, however, when the leverage increasing firm's rival is relatively unlevered. The first observation is consistent with a model where firms compete for market share on the basis of price. The second observation can be explained within the context of a Stackelberg model where the relatively unlevered rival acts as the Stackelberg price leader.
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This article shows (1) how entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure, and (2) how, given a trade-off between tax advantages and agency costs, a firm will optimally adjust its leverage level after it is set up. We derive simple pricing expressions for corporate debt in which the price elasticity of demand for industry output plays a crucial role. When a firm optimally adjusts its leverage over time, we show that total firm value comprises the value of discounted cash flows assuming fixed capital structure, plus a continuum of options for marginal increases in debt.
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We examine whether sharp debt increases through leveraged buyouts and recapitalizations interact with market structure to influence plant closing and investment decisions of recapitalizing firms and their rivals. We take into account the fact that recapitalizations and investment decisions are both endogenous and may be simultaneously influenced by the same exogenous events. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. Rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.
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While the theoretical relation between taxes and capital structure has been extensively analyzed, the empirical evidence on this issue has thus far been inconclusive. One of the main difficulties confronting previous empirical studies of the cross-sectional relationship between taxes and leverage was the control of intervening variables. The Tax Reform Act of 1986 (TRA), which drastically changed the tax regime, provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment. The authors test the relationship between leverage and certain tax-related variables for a large sample of companies in the years surrounding the enactment of TRA. The results support the tax-based theories of capital structure. The findings indicate that there exists a substitution effect between debt and nondebt tax shields, and that both corporate and personal tax rates affect leverage decisions. Coauthors are Dan Givoly, Aharon R. Ofer, and Oded Sarig.
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