Corporate Capital Structure: The Control Roles of Bank and Public Debt with Taxes and Costly Bankruptcy

Diamond, Douglas W.

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Corporate Capital Structure: The Control Roles of Bank and Public Debt with Taxes and Costly Bankruptcy

FRB Richmond Economic Quarterly, vol. 80, no. 2, Spring 1994, pp. 11-37

27 Pages Posted: 14 Nov 2012

See all articles by Douglas W. Diamond

Douglas W. Diamond

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: 1994

Abstract

Traditional capital structure theory trades off tax savings of debt against bankruptcy costs. Combining elements of this theory with a model of the control role of debt characterizes the optimal amounts of equity, bank debt, and publicly traded debt. Debt's control role makes bankruptcy costs endogenous and sometimes negative. Capital structure depends on the correlation between cash flows and the profitability of new investment, as well as on taxes and several bankruptcy costs.

Suggested Citation: Suggested Citation

Diamond, Douglas W., Corporate Capital Structure: The Control Roles of Bank and Public Debt with Taxes and Costly Bankruptcy (1994). FRB Richmond Economic Quarterly, vol. 80, no. 2, Spring 1994, pp. 11-37, Available at SSRN: https://ssrn.com/abstract=2125401