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PRODUCTION TECHNOLOGY, NONDEBT TAX SHIELDS, AND FINANCIAL LEVERAGE
Author(s) -
Manuel Timothy,
Pilotte Eugene
Publication year - 1992
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1992.tb00796.x
Subject(s) - leverage (statistics) , debt , monetary economics , business , production (economics) , tax shield , economics , finance , microeconomics , tax reform , public economics , state income tax , machine learning , computer science , gross income
In the literature a negative relationship between debt and nondebt tax shields is predicted only for firms that have the same production technology (i.e., firms with perfectly correlated pretax output). In this paper we examine the relationship between production technology and differences in firms' financial leverage ratios, and find that firms in the same industry with highly (lowly) correlated output make similar (dissimilar) leverage decisions. Thus, the correlation of output across states of nature helps explain leverage differences that are not explained by industry differences. Contrary to previous predictions, however, leverage differences for firms with highly correlated pretax output suggest a positive relationship between debt and nondebt tax shields.