PRODUCTION TECHNOLOGY, NONDEBT TAX SHIELDS, AND FINANCIAL LEVERAGE

Timothy Manuel, Eugene Pilotte

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)167-180
Number of pages14
JournalJournal of Financial Research
Volume15
Issue number2
DOIs
StatePublished - 1992

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