Three alternative characterizations of corporate debt management policy, which have had wide currency in the literature, are examined. They are shown to give rise to substantial differences in their predictions of total-firm value. This study concludes that, of the three, the one that assumes that management periodically rebalances the firm's debt levels in response to evolving new information on expected future operating cash flows is the most logically consistent. On that basis, a reinterpretation of the available empirical evidence on the ‘Tax effect' of debt is indicated.
ASJC Scopus subject areas
- Economics and Econometrics