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The Capital Structure Puzzle Revisited

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  • Berens, James L
  • Cuny, Charles J

Abstract

Corporate finance researchers have long been puzzled by low corporate debt ratios given debt's corporate tax advantage. This article recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a nongrowing stream of interest payments. Debt to value is therefore a distorted measure of corporate tax shielding. Even with very small debt- related costs, this may explain the observed magnitude and cross- sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the trade-off theory of capital structure. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Berens, James L & Cuny, Charles J, 1995. "The Capital Structure Puzzle Revisited," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1185-1208.
    • Handle: RePEc:oup:rfinst:v:8:y:1995:i:4:p:1185-1208
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