James A. Read Jr
The Brattle Group
44 Brattle Street
Cambridge, MA 02138
Institutional Affiliation: The Brattle Group
NBER Working Papers and Publications
|April 2013||A Theory of Risk Capital|
in New Perspectives on Corporate Capital Structure, Viral V. Acharya, Heitor Almeida, and Malcolm Baker, organizers
|June 2012||Real Options, Taxes and Financial Leverage|
with : w18148
We show how the value of a real option depends on corporate income taxes and the option's "debt capacity," defined as the amount of debt supported or displaced by the option. The value of the underlying asset must be an adjusted present value (APV). The risk-free rate of interest must be after-tax. Debt capacity depends on the APV and target debt ratio for the underlying asset, on the option delta and on the amount of risk-free borrowing or lending that would be needed for replication. The target debt ratio for a real call option is almost always negative. Observed debt ratios for growth firms that follow the tradeoff theory of capital structure will be lower than target ratios for assets in place. Our results can rationalize some empirical financing patterns that seem inconsistent wit...
Published: Stewart C. Myers & James A. Read Jr., 2020. "Real Options, Taxes and Financial Leverage," Critical Finance Review, vol 9(1-2), pages 29-76.