On the Existence of an Optimal Capital Structure: Theory and Evidence MICHAEL BRADLEY, GREGG A. JARRELL, and E. HAN KIM* ONE OF THE MOST contentious issues in the theory of finance during the past quarter century has been the theory of capital structure. The geneses of this controversy were the seminal contributions by Modigliani and Miller [18, 191. The general academic view by the mid-19709, although not a consensus, was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs. No sooner did this general view become prevalent in the profession than Miller  presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level. Since then there has developed a burgeoning theoretical literature attempting to reconcile Millerâs model with the balancing theory of optimal capital structure [e.g., DeAngelo and Masulis , Kim , and Modigliani . The general result of this work is that if there are significant âleverage-relatedâ costs, such as bankruptcy costs, agency costs of debt, and loss of non-debt tax shields, and if
The Journal of Finance – Wiley
Published: Jul 1, 1984
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