Required return on equity when capital structure is dynamic

Na Dai and Louis R. Piccotti

Financial Management, 2020, vol. 49, issue 1, 265-289

Abstract: We link the firm's required return on equity to its target debt ratio. We find that a firm's expected return on equity is increasing in the product of the distance between its debt ratio and its target debt ratio, its speed of adjustment, and the spread of the tax benefits of its debt over its bankruptcy costs of debt. Our empirical tests validate the testable implications of our model.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finmgt:v:49:y:2020:i:1:p:265-289

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