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Capital Structure and the Informational Role of Debt

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Author Info
 Harris, Milton
Raviv, Artur

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Abstract

This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. The authors 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. The authors 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. Copyright 1990 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 45 (1990)
Issue (Month): 2 (June)
Pages: 321-49
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Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:321-49

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This page was last updated on 2008-9-29.

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