Capital Structure and Agency Costs

So far, we've focused on how financial policy might affect a firm's tax obligations.

How do our conclusions from that analysis compare with what we actually observe?

What explains the apparent discrepancy?

Remember:

If:

• financial policy affects firm value

Then it must be because at least one of the following is true:

• financial policy affects a firm's tax obligation
• financial policy affects contracting costs
• financial policy affects real investment policy