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Required return on equity when capital structure is dynamic

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Listed:
  • Na Dai
  • Louis R. Piccotti

Abstract

We link the firm's required return on equity to its target debt ratio. We find that a firm's expected return on equity is increasing in the product of the distance between its debt ratio and its target debt ratio, its speed of adjustment, and the spread of the tax benefits of its debt over its bankruptcy costs of debt. Our empirical tests validate the testable implications of our model.

Suggested Citation

  • Na Dai & Louis R. Piccotti, 2020. "Required return on equity when capital structure is dynamic," Financial Management, Financial Management Association International, vol. 49(1), pages 265-289, March.
    • Handle: RePEc:bla:finmgt:v:49:y:2020:i:1:p:265-289
    DOI: 10.1111/fima.12266
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    Cited by:

    1. Mu-Jung Huang & Kuo-Chih Cheng & Ching-Ju Huang & Kun-Meng Lin & Huo-Ming Wang & Cheng-Kuo Chuang & Ming-Cheng Wu, 2021. "Establishing a Dynamic Capital Structure Model for Company Sustainability Performance Using Data Mining Techniques," Sustainability, MDPI, vol. 13(11), pages 1-15, May.

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