Cash flows risk, capital structure, and corporate bond yields

Berardino Palazzo

Annals of Finance, 2019, vol. 15, issue 3, No 4, 420 pages

Abstract: Abstract This paper explores the effects of a firm’s cash flow systematic risk on its optimal capital structure. In a model where firms are allowed to borrow resources from a competitive lending sector, those with cash flows more correlated with the aggregate economy (i.e., firms with riskier assets in place) choose a lower leverage given their higher expected financing costs. On the other hand, less risky firms, having lower expected financing costs, optimally choose to issue more debt to exploit a tax advantage. The model predicts that cash flow systematic risk is negatively correlated with leverage and corporate bond yields.

Keywords: Systematic risk; Optimal capital structure; Assets prices (search for similar items in EconPapers)
JEL-codes: D92 G12 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10436-018-00342-9

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