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Debt, Agency Costs, and Industry Equilibrium

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Author Info
 Maksimovic, Vojislav
Zechner, Josef

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Abstract

The authors show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels. Copyright 1991 by American Finance Association.

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

Volume (Year): 46 (1991)
Issue (Month): 5 (December)
Pages: 1619-43
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Handle: RePEc:bla:jfinan:v:46:y:1991:i:5:p:1619-43

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  1. Acharya, Viral V., 2009. "A Theory of Systemic Risk and Design of Prudential Bank Regulation," CEPR Discussion Papers 7164, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Baggs, Jennifer & Brander, James A., 2005. "Trade Liberalization, Profitability, and Financial Leverage," Analytical Studies Branch Research Paper Series 2005256e, Statistics Canada, Analytical Studies Branch. [Downloadable!]
    Other versions:
  3. Baggs, Jennifer & Brander, James A., 2005. "Libéralisation des échanges, rentabilité et levier financier," Direction des études analytiques : documents de recherche 2005256f, Statistics Canada, Direction des études analytiques. [Downloadable!]
  4. Rosellon, M., 1999. "Liquidation values, risk and capital structure," Discussion Paper 32, Tilburg University, Center for Economic Research. [Downloadable!]
  5. Peter MacKay & Gordon M. Phillips, 2002. "Is There an Optimal Industry Financial Structure?," NBER Working Papers 9032, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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