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Corporate Debt Management and the Value of the Firm


  • Lewellen, Wilbur G.
  • Emery, Douglas R.


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.

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  • Lewellen, Wilbur G. & Emery, Douglas R., 1986. "Corporate Debt Management and the Value of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 415-426, December.
  • Handle: RePEc:cup:jfinqa:v:21:y:1986:i:04:p:415-426_01

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    References listed on IDEAS

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    6. Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-616, May.
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    8. Turnbull, Stuart M, 1979. "Debt Capacity," Journal of Finance, American Finance Association, vol. 34(4), pages 931-940, September.
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    10. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-265, March.
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    Cited by:

    1. Schauten Marc B. J., 2013. "Three discount methods for valuing projects and the required return on equity," Contaduría y Administración, Accounting and Management, vol. 58(1), pages 63-85, enero-mar.
    2. Fernandez, Pablo, 2005. "Financial literature about discounted cash flow valuation," IESE Research Papers D/606, IESE Business School.
    3. Valladão, Davi M. & Veiga, Álvaro & Veiga, Geraldo, 2014. "A multistage linear stochastic programming model for optimal corporate debt management," European Journal of Operational Research, Elsevier, vol. 237(1), pages 303-311.
    4. Fernandez, Pablo, 2003. "Equivalence of ten different methods for valuing companies by cash flow discounting," IESE Research Papers D/524, IESE Business School.
    5. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    6. Pablo Fernández, 2007. "Valuing companies by cash flow discounting: ten methods and nine theories," Managerial Finance, Emerald Group Publishing, vol. 33(11), pages 853-876, October.
    7. Robert A. Taggart, Jr., 1989. "Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes," NBER Working Papers 3074, National Bureau of Economic Research, Inc.
    8. Fernández, Pablo, 1995. "Equivalence of the APV, WACC and flows to equity approaches to firm valuation," IESE Research Papers D/292, IESE Business School.
    9. Fernández, Pablo, 1999. "Equivalence of the different discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation," IESE Research Papers D/400, IESE Business School.
    10. Stefan Dierkes & Ulrich Schäfer, 2017. "Corporate taxes, capital structure, and valuation: Combining Modigliani/Miller and Miles/Ezzell," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 363-383, February.
    11. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
    12. Fernandez, Pablo, 2004. "Equivalence of ten different discounted cash flow valuation methods," IESE Research Papers D/549, IESE Business School.
    13. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    14. Fernandez, Pablo, 2003. "Levered and unlevered Beta," IESE Research Papers D/488, IESE Business School.
    15. Fernandez, Pablo, 2004. "Value of tax shields and the risk of the net increase of debt, The. Year 2004," IESE Research Papers D/544, IESE Business School.
    16. Fernandez, Pablo, 2006. "The correct value of tax shields: An analysis of 23 theories," IESE Research Papers D/628, IESE Business School.

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