S. Abraham Ravid
ABSTRACT
This paper provides a tax induced framework which can explain the linkage
between pricing policies and capital structure choice documented in recent
studies by Chevalier (1995a), (1995b) and Phillips (1995). The model proves
that firms will optimally change their pricing decisions after taking on
additional debt. The reason is that the value of debt related tax shelters
and the probability of their use is dependent on revenues realized in the
product market. The direction of change is shown to depend on several variables,
importantly the elasticity of demand for the firm's product. In an ensuing
section, the paper extends the analysis to provide some insights into the
impact of pricing choices on the promised yield of debt.
Ravid: (973) 353-5540
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