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Investment Patterns and Financial Leverage

  • Michael S. Long
  • Ileen B. Malitz
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    This study Investigates the influence of the type of investment opportunities facing a firm on its choice of capital structure. It is shown that the more discretionary investment opportunities a firm faces,the lower its financial leverage. Inclusion of other possible determinants of capital structure, such as availability of internal funds, tax effects and risk, while significant, do not affect the importance of discretionary investment. The evidence supports (1) the existence of a moral bazzard problem which inversely relates risky debt and discretionary investment choice, and (2) a desire by most firms to use sources of internal funds prior to entering the capital market.

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    File URL: http://www.nber.org/papers/w1145.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1145.

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    Date of creation: Jun 1983
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    Publication status: published as Long, Michael S. and Ileen B. Malitz. "Investment Patterns and Financial Leverage." Corporate Capital Structures in the United States, edited by Benjamin M. Friedman. Chicago: Univ. of Chicago Press, (1985), pp. 353-37 7.
    Handle: RePEc:nbr:nberwo:1145
    Note: ME
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.orgEmail:


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    1. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-52, May.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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