Debt, Agency Costs and Industry Equilibrium

Vojislav Maksimovic, Josef Zechner

Publication: Scientific journalJournal articlepeer-review


We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.
Original languageEnglish
Pages (from-to)1619 - 1643
JournalJournal of Finance
Issue number5
Publication statusPublished - 1991

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