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Debt, Agency Costs, and Industry Equilibrium
Author(s) -
MAKSIMOVIC VOJISLAV,
ZECHNER JOSEF
Publication year - 1991
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1991.tb04637.x
Subject(s) - capital structure , incentive , debt , monetary economics , agency cost , investment (military) , business , cost of capital , cash flow , economics , cash , capital (architecture) , finance , microeconomics , corporate governance , politics , political science , law , shareholder , history , archaeology
We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.