A Note on Debt Capacity in Mergers

Korwar Ashok

IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Debt capacity is commonly thought to increase in a corporate merger. This note observes that the very concept of debt capacity appears to have evolved over time. In keeping with this, a fresh definition of debt capacity is proposed, placing the concept firmly in the context of optimal capital structure. The note proceeds to show, relying on a widely accepted model of optimal capital structure under corporate and personal taxation, namely that proposed by De Angelo and Masulis (1980) that debt capacity generally decreases in a merger, contrary to the usual result.

Date: 1993-04-01
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Persistent link: https://EconPapers.repec.org/RePEc:iim:iimawp:wp01168

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