The effect of business risk on corporate capital structure: Theory and evidence

Noe, Thomas, Kale, Jayant R and Ramirez, Gabriel (1991) The effect of business risk on corporate capital structure: Theory and evidence. The Journal of Finance, 46 (5). pp. 1693-1715.

Abstract

Under corporate and personal taxation, we demonstrate that the relation between optimal debt level and business risk is roughly U-shaped. This result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option. Therefore, the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options. Results of empirical tests offer support for the predicted U-shaped relationship.

Item Type: Article
Keywords: Debt; Determinants; Existence; Firms; Information; Leverage; Stock; Taxes
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 26 Feb 2012 11:53
Last Modified: 23 Oct 2015 14:06
URI: http://eureka.sbs.ox.ac.uk/id/eprint/1156

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