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The Relation between Risk and Optimal Debt Maturity and the Value of Leverage

Published online by Cambridge University Press:  06 April 2009

James B. Wiggins
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Abstract

This paper considers the capital structure and debt maturity choice for a value-maximizing corporation. In the model, interest expense is tax deductible, bankruptcy is costly, and debt is fairly priced at issue. In contrast to the results of Kane, Marcus, and McDonald (1985), optimal debt maturity does not always approach zero in the absence of transaction costs, and is increasing in the volatility of the assets of the firm. The model predicts a positive association between the value of leverage and total risk in some circumstances.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 3 , September 1990 , pp. 377 - 386
Copyright
Copyright © School of Business Administration, University of Washington 1990

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