The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence
Published: 12/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04640.x
JAYANT R. KALE, THOMAS H. NOE, GABRIEL G. RAMÌREZ
Under corporate and personal taxation, we demonstrate that the relation between optimal debt level and business risk is roughly U‐shaped. This result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option. Therefore, the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options. Results of empirical tests offer support for the predicted U‐shaped relationship.