Bankruptcy, interest tax shields and ‘optimal’ capital structure: A cash flow formulation

1984 ◽  
Vol 5 (2) ◽  
pp. 116-119
Author(s):  
Jacques A. Schnabel
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Optimal Capital Structure ◽  
Tax Shields ◽  
Optimal Capital

scholarly journals The Commitment Role of Equity Financing

2018 ◽  
Vol 17 (4) ◽  
pp. 1232-1260 ◽  
Author(s):  
Matthias Fahn ◽  
Valeria Merlo ◽  
Georg Wamser
Keyword(s):  
Capital Structure ◽  
Debt Financing ◽  
Negative Consequences ◽  
Equity Financing ◽  
Bankruptcy Risk ◽  
Optimal Capital Structure ◽  
Tax Shields ◽  
Optimal Capital ◽  
Financing Behavior

Abstract Existing theories of a firm’s optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for firms that show a strong commitment toward their workforce and are popular among employees. We demonstrate that such financing behavior may be driven by implicit arrangements made between a firm and its managers/employees. Equity financing generally strengthens a firm’s credibility to honor implicit promises. Debt, however, has an adverse effect on the enforceability of these arrangements because too much debt increases the firm’s reneging temptation, as some of the negative consequences of breaking implicit promises can be shifted to creditors. Our analysis provides an explanation for why some firms only use little debt financing. Predictions made by our theory are in line with a number of empirical results, which seem to stay in contrast to existing theories on capital structure.

Optimal Capital Structure for Maximizing the Firm Value

2020 ◽  
pp. 41-59
Author(s):  
Rumeysa Bilgin
Keyword(s):  
Capital Structure ◽  
Firm Value ◽  
Current Status ◽  
Future Research ◽  
Income Volatility ◽  
Optimal Capital Structure ◽  
Tax Shields ◽  
Optimal Capital ◽  
Tax Payments ◽  
Target Leverage

Capital structure decisions of management affect the value of a firm. This fact leads to the creation of an extremely rich capital structure literature over the last 60 years. This chapter explains main theories of capital structure and discusses the concept of target leverage which maximizes the firm value. The roles of tax payments, profitability, firm size, asset tangibility, growth opportunities, income volatility, and non-debt tax shields are examined as determinants of capital structure. The current status of capital structure research and some important empirical issues are discussed. Considerations for future research are presented.

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