A Survey of Research of Target Debit Ratio

Yuang Zhou () and Sihan Qin
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Yuang Zhou: King’s College London, Faculty of Social Science and Public Policy
Sihan Qin: Columbia International School

A chapter in Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023), 2024, pp 598-606 from Springer

Abstract: Abstract When firms increase the amount of debt in a situation with corporate tax, the amount of the tax shield and the cost of bankruptcy increase. The tradeoff theory of capital structure states that firms choose their target debt ratio to maximize the value of firms. The problem is that the target can not be directly observed. Many scholars have hotly debated this. Some papers with empirical data test the tradeoff theory and support the target. However, some other articles show that the test of tradeoff theory has no statistical power and can not reject alternative hypotheses. In addition, some scholars test the evidence that supports the tradeoff theory and find out that the evidence has no statistical power. There are many studies on the target debt ratio, and this paper will look at some of the most important ones.

Keywords: Tradeoff theory; target-debt ratio; statistical power; partial adjustment; adjustment cost (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-246-0_72

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DOI: 10.2991/978-94-6463-246-0_72

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