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Leverage Changes and Product Pricing Incentives -- A Tax Induced Analysis

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  • S. Abraham Ravid
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    Abstract

    This paper provides a tax induced framework which can explain the linkage between pricing policies and capital structure choice documented in recent studies by Chevalier (1995a), (1995b) and Phillips (1995). The model proves that firms will optimally change their pricing decisions after taking on additional debt. The reason is that the value of debt related tax shelters and the probability of their use is dependent on revenues realized in the product market. The direction of change is shown to depend on several variables, importantly the elasticity of demand for the firm's product. In an ensuing section, the paper extends the analysis to provide some insights into the impact of pricing choices on the promised yield of debt.

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    Bibliographic Info

    Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-055.

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    Date of creation: Oct 1997
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    Handle: RePEc:fth:nystfi:98-055

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    Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
    Phone: (212) 998-0100
    Web page: http://w4.stern.nyu.edu/finance/
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    Cited by:
    1. Matthew J. Clayton & S. Abraham Ravid, 1999. "The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-055, New York University, Leonard N. Stern School of Business-.

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