Capital structure and the informational role of debt

Article Abstract:

This paper provides a theory of capital structure based on the effect of debt on investor's information about the firm and on their ability to oversee management. We postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. We characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc. (Reprinted by permission of the publisher.)

Management, Evaluation, Accounting and auditing, Investments, Debt financing (Corporations), Debt financing, Capital

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Debt financing and tax status: tests of the substitution effect and the tax exhaustion hypothesis using firms' responses to the economic Recovery Tax Act of 1981

Article Abstract:

This study tests the joint prediction of the substitution effect and the tax exhaustion hypothesis that an increase in non-debt tax shields leads to a decreases in leverage. Controls are introduced for the debt securability effect, the pecking order theory of financing, and the probability of losing tax shields. Using the relationship between changes in investment tax shields and changes in debt tax shields of firms in response to the Economic Recovery Act of 1981, strong empirical support is found for predictions based on the substitution effect and the tax exhaustion hypothesis. (Reprinted by permission of the publisher.)

Tax shelters

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Conglomerate Merger, Wealth Redistribution and Debt: A Note

Article Abstract:

Wealth redistribution effects of mergers are investigated. Perfect correlation of the merging firm's cash flows is necessary but not sufficient for wealth invariance among equity holders. Debt holder wealth redistribution occurs within if premerger claims are held constant.

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