The Impact of Capital Structure Change on Firm Value: Some Estimates



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    • Assistant Professor of Economics and Finance, University of California, Los Angeles. I would like to thank Walter Blum, Michael Brennan, George Constantinides, Larry Dann, Kenneth French, Nicholas Gonedes, Albert Madansky, David Mayers, Robert Merton, Merton Miller, Harry Roberts, Myron Scholes, Robert H. Litzenberger and especially Robert Hamada, for their considerable help and encouragement. This is based on a chapter of my dissertation written at the University of Chicago. I have also benefited from the suggestions of the participants in the many finance workshops where this paper was presented. I also wish to thank the many U.S. corporations which voluntarily co-operated in this study. An earlier version of this paper was presented at the Western Finance Association meetings in Jackson Hole in June 1981. I take sole responsibility for any remaining errors.


This study develops a model based on current corporate finance theories which explains stock returns associated with the announcement of issuer exchange offers. The major independent variables are changes in leverage multiplied by senior security claims outstanding and changes in debt tax shields. Parameter estimates are statistically significant and consistent in sign and relative magnitude with model predictions. Overall, 55 percent of the variance in stock announcement period returns is explained. The evidence is consistent with tax-based theories of optimal capital structure, a positive debt level information effect, and leverage-induced wealth transfers across security classes.