In this paper, I extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm. I find that announcement-period stock returns for firms moving "away from" industry debt-to-equity norms are significantly more negative than returns for firms moving "closer to" these norms. This finding is consistent with optimal capital structure theory if industry debt-toequity norms are reasonable approximations of wealth-maximizing leverage ratios.The event study research of security offerings has largely failed to explore how stock prices react when a firm changes its debt-to-equity ratio (DE) in relationship to its industry DE norm.1 This lack of serious regard by event studies for the role of an industry DE benchmark is puzzling given the insight of financial leverage ratio research. This line of research suggests that an industry DE benchmark should prove useful in predicting the direction and magnitude of stock returns that accompany pure leverage-change announcements.In this paper, I am motivated by the notion that an industry DE norm (e.g., median or mean) is a useful benchmark when investors evaluate a stock's true worth. The research hypothesis is that firms moving "closer to" industry DE benchmarks should have a market response that is positive when compared to firms moving "away from" industry DE benchmarks. To test this hypothesis, I obtain a working sample of 338 observations where firms announce public common stock offerings. This sample is distinctive in two respects that are important for achieving the research aim.First, it is distinctive in that the sole purpose of each offering is for debt reduction. Not only are the productive assets not directly altered, but simultaneously 1 As discussed later, an exception is Billingsley, Smith, and Lamy (1994), who focus their examination upon firms that simultaneously issue equity and debt. changing both equity and debt produces a large alteration in a firm's DE. Given the notion that firms operate within target DE ranges, large movements in DEs may be required to detect if the market reacts consistently with the view that an industry DE benchmark is a wealth-maximizing target.Second, the sample is distinctive in its size (n=338). Despite the support by leverage ratio research for the importance of an industry DE benchmark, one can argue that an industry benchmark DE may not always be a good estimate of what is perceived as its wealthmaximizing DE. Consequently, a large sample offers the possibility of overcoming estimation problems if one can assume that errors in estimating become less of a concern as the sample size increases.In support of the research hypothesis, I find that the three-day mean cumulative abnormal return (CAR) of -1.91% for "closer to" firms is less negative than the -3.41% CAR found for "away from" firms.2 The 2 Pure-leverage-decrease studies consisting largely of stockfor-debt transactions (e.g.,

I examine planned senior-for-junior and junior-for-senior transactions that are subsequently cancelled. I find statistically significant stock returns for issuance and cancellation announcements that are positively related to the direction of the leverage change. The magnitude and direction of the returns differ from previous research.Discrepancies are attributed to different issuance purposes.

This paper’s purpose is to compare nonprofits with pass-throughs in terms of valuation, leverage, and growth. To achieve this purpose, we use the Capital Structure Model. This model determines maximum firm valuation through incorporating real data (tax rates, credit spreads, and historical growth rates). Since this is the first study to offer our particular set results on valuation, leverage and growth, our findings are value-additive in terms of the comparative research on nonprofits and pass-throughs. The new and scientific value of our findings are further established by robust tests that modify values for key variables. Major findings include the following. Nonprofits have over a fifty percent valuation advantage over pass-throughs and achieve a four times greater increase in dollar value when going from nongrowth to growth. The latter accomplishments are attained with a smaller before-tax plowback ratio and less retained earnings. Such achievements occur because nonprofits are not taxed on earnings retained for growth. While nonprofits have somewhat greater optimal leverage ratios than pass-throughs, they gain a bit less in dollars added from debt unless growth rates increase as projected when tax rates are lowered. Nonprofits gain less percentage-wise from debt because their unlevered firm value is greater than pass-throughs.

AUTHORSRobert M. AbstractThis paper extends the Capital Structure Model (CSM) research by performing the following tasks. First, a correction is offered on the corporate tax rate adjustment found in the break-through concept of the levered equity growth rate (g L ) given by Hull (2010). This correction is important because g L links the plowback-payout and debt-equity choices and so its accuracy is paramount. Second, this paper introduces a retained earnings (RE) constraint missing from the CSM growth research when a firm finances with internal equity. The RE constraint governs the plowback-payout and debt-equity choices through the interdependent relation between RE and interest payments (I). Third, a by-product of the RE constraint is a second constraint that governs a no-growth situation so that I does not exceed the available cash flows. Fourth, with the g L correction and two constraints in place, updated applications of prior research and new applications are provided. These applications reveal lower gain to leverage (G L ) values than previously reported with more symmetry around the optimal debt-toequity ratio (ODE) while minimizing steep drop-offs in firm value. For larger plowback ratios, the optimal debt level choice can change. The new constraints serve to point out the need for further research to incorporate external financing within the CSM framework.

This study has two major purposes. First, we extend capital structure model (CSM) research so that it can be applied to both ownership forms of forprofit organizations (FPOs): pass-throughs and C corp. We do this by deriving the first pass-through CSM equations. These equations complement the extant C corp CSM equations. Second, we derive new CSM equations to test tax policy reform. Since FPOs are responsible for most of federal tax revenue, these equations can produce outputs showing how FPO business wealth and federal tax revenue are changed when tax policy reform makes business growth more affordable by not taxing FPO earnings that are retained for growth. After deriving these new equations, we provide data in the form of effective tax rates and growth rates as well as a methodology to compute costs of borrowing. This data and methodology show how CSM equations can be applied to FPO studies. The major area of originality concerns the notion that both business wealth and federal tax revenue can increase if governments reform their tax policy by granting tax shields that promote growth while simultaneously doing away with tax shields that distorts owner efficiency caused by favoring debt over equity.