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Corporate Debt Management and the Value of the Firm

Published online by Cambridge University Press:  06 April 2009

Wilbur G. Lewellen  and
Douglas R. Emery
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 4 , December 1986 , pp. 415 - 426
Copyright
Copyright © School of Business Administration, University of Washington 1986

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References

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