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Standard financial theory (in the absence of agency costs and personal taxes) implies that each dollar of debt contributes to the value of the firm in proportion to the firm's tax rate. To derive this result, incremental debt is assumed permanent. This paper shows that when the firm acts to maintain a constant market value leverage ratio, the marginal value of debt financing is much lower than the corporate tax rate. Since Hamada's [2] unlevering procedure for observed equity betas was derived under the assumption of permanent debt, we derive an unlevering procedure consistent with the assumption of a constant leverage ratio. IMPLICIT IN THE MODIGLIANI-MILLER [4] hypothesis regarding the effect of leverage changes on firm value is that the firm maintains a constant level of debt. The purpose of this paper is to examine the implications for tax shield valuation of maintaining a constant market value leverage ratio instead of a constant debt level. Assuming a constant leverage ratio instead of a constant debt level does not imply any change in the normative implications of capital structure theory.However, we show that when the firm's financing strategy is to maintain a constant market value leverage ratio, the marginal value of a change in debt level resulting from a change in this leverage ratio is much lower than the corporate tax rate. We also derive the relationship between the firm's equity beta and its unlevered beta under the assumption of a constant leverage ratio.

This paper presents estimates of the effect of a voluntary spin-off announcement on shareholder wealth. The results show that spin-off announcements have a positive influence on stock prices and that the relative increase in share price is greater for large spin-offs than for small ones. A SPIN-OFF OCCURS when a company distributes all of the common shares it owns in a controlled subsidiary to its existing shareholders, thereby creating a separate public company.1 This type of divestiture is in contrast to a sell-off, where the divested assets are purchased and become part of another firm. This paper examines the effect of a voluntary (as opposed to court-ordered) spin-off on the wealth level of shareholders. Several authors (e.g., Alexander et al. [1], Boudreaux [2], and Kummer [12]) have examined the effect of sell-offs on share values. Although Kudla and Mclnish [11] have published an empirical analysis of spin-offs, a sample size of six firms limits the generality of their conclusion that spin-offs increase shareholder wealth. Moreover, the authors use the day that the new shares are distributed as their event date. This paper remedies both of these shortcomings by examining the price behavior of 55 securities around the initial spin-off announcement day. We find that spin-off announcements enhance shareholder wealth and that these announcements usually follow a period of positive abnormal returns. These results are in contrast to the recent sell-off findings of Alexander et al. [1] who conclude that the announcement of a voluntary sell-off does not have a significance influence on the stock prices of divesting firms. Furthermore, they find negative abnormal returns over the 30-day period preceding the event. Section I of this paper considers some theoretical reasons for spin-offs and analyzes their valuation consequences. The research design and empirical findings are presented in Sections II and III, respectively. The paper ends with a summary and conclusions section. * Pennsylvania State University and Emory University, respectively. This paper has benefited greatly from the constructive criticisms of William Beranek, Joseph Sinkey, and participants of the Pennsylvania State Finance Workshop. We are also grateful to Stephen Brown for his assistance in the statistical methodology. ' Fitzhenry [8]. "Control" is defined as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. The taxation consequences of a spin-off are identical to that of a stock dividend (i.e., it is a tax-free exchange).