UNSPECIFIED (1997) Debt in industry equilibrium. REVIEW OF FINANCIAL STUDIES, 10 (1). pp. 39-67. ISSN 0893-9454

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Abstract

This article shows (1) bow entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure, and (2) how, given a trade-off between tax advantages and agency costs, a firm will optimally adjust its leverage level after it is set up. We derive simple pricing expressions for corporate debt in which the price elasticity of demand for industry output plays a crucial role. When a firm optimally adjusts its leverage over time, we show that total firm value comprises the value Of discounted cash flows assuming fixed capital structure, plus a continuum of options for marginal increases in debt.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	REVIEW OF FINANCIAL STUDIES
Publisher:	OXFORD UNIV PRESS INC
ISSN:	0893-9454
Date:	1997
Volume:	10
Number:	1
Number of Pages:	29
Page Range:	pp. 39-67
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/18000

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