We develop a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice. Using panel data on leverage choices and the model's predictions for different statistical moments of leverage, we show that while refinancing costs help explain the...

I propose a neoclassical production economy with costly external financing, partial investment irreversibility, and endogenous investment/financing decisions to rationalize and quantify the well-documented interaction between the book-to-market equity effect and the financial leverage effect in...

This paper rationalizes empirical patterns of market leverage, book leverage, book-to-market ratios, and stock returns across different book-to-market portfolios, using a model of firm financing and investment. The model shows analytically that tax-deductibility of interest payments increases...

The recent interest in the valuation of the benefits from debt financing arises from the disagreement in the financial literature about the meaning of “value of tax shields.” Although it is accepted that the tax deductibility of interest increases the value of the firm, the correct valuation...

The paper provides review of Modigliani-Miller capital structure irrelevance proposition and its development since 1958. The paper suggests some pedagogical insights and introduce risk-shifting interpretations of the MM model. We also discuss shapes of cost of debt and cost of equity functions...

This article challenges Modigliani & Miller's (M&M) Famous Homemade Leverage Proof. The M&M proof suggests that since in efficient markets any value impact from leverage results in a homemade arbitrage opportunity, leverage must be value neutral. However, through the uncontroversial notion of...

This paper shows that distinguishing between gross and net tax shields arising from interest deductions is important to firm valuation. The distinction affects the interpretation but not valuation of tax shields for the famous Miller (1977) model with corporate and personal taxes. However, for...

This paper investigates whether firms vary the debt side of their capital structure, based on changes in investor demand for bonds. Examining asset flows into various asset classes over the last 30 years reveals that companies respond to recent increases in demand for bonds from investors by...

The value of tax shields (VTS) defines the increase in the company's value as a result of the tax saving obtained by the payment of interest. However, there is no consensus in the existing literature regarding the correct way to compute the VTS. Most authors think of calculating the VTS in terms...

The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke).The WACC is neither a cost nor a required return: it is a weighted average of a cost and a required...