Capital Structure and the Informational Role of Debt

MILTON HARRIS*, ARTUR RAVIV

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

536 Scopus citations

Abstract

This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. We postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. We characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc. 1990 The American Finance Association

Original languageEnglish (US)
Pages (from-to)321-349
Number of pages29
JournalThe Journal of Finance
Volume45
Issue number2
DOIs
StatePublished - Jun 1990

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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