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- Title
ON THE FIRM'S PRODUCTION, CAPITAL STRUCTURE AND DEMAND FOR DEBT.
- Authors
Nakamura, Alice; Nakamura, Masao
- Abstract
The corporate presence in bond markets and corporate borrowing from banks can be expected to affect both interest rates and the demand for money. But some economists have ignored financial decisions in their studies assuming that they do not effect the investment and production decisions of firms. According to authors any large macro model must somehow account for the borrowing behavior of firms. In this article they derive an equation for the long-term debt ratio of a firm which can be estimated using available data. The theoretical model presented by them implies that the long-term debt ratio which maximizes the present value of the existing stockholder's equity depends positively on the cost of equity and negatively on the cost of debt, capital productivity, and retained earnings. The value of equity in a neoclassical firm may be represented as the present value net of taxes of all dividends to be received by the stockholder and the capital gains which will be realized if, and when, the stockholder sells his equity.
- Subjects
CORPORATE finance; DEBT; EQUITY (Law); LOANS; BOND market; ECONOMIC impact of business enterprises; INVESTMENTS; DECISION making; CAPITAL gains; ECONOMIC models
- Publication
Review of Economics & Statistics, 1982, Vol 64, Issue 3, p384
- ISSN
0034-6535
- Publication type
Article
- DOI
10.2307/1925936