TY - JOUR
T1 - PRODUCTION TECHNOLOGY, NONDEBT TAX SHIELDS, AND FINANCIAL LEVERAGE
AU - Manuel, Timothy
AU - Pilotte, Eugene
PY - 1992
Y1 - 1992
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84986469560&partnerID=8YFLogxK
U2 - 10.1111/j.1475-6803.1992.tb00796.x
DO - 10.1111/j.1475-6803.1992.tb00796.x
M3 - Article
AN - SCOPUS:84986469560
SN - 0270-2592
VL - 15
SP - 167
EP - 180
JO - Journal of Financial Research
JF - Journal of Financial Research
IS - 2
ER -