Taxes and Capital Structure Review of Literature

Hennessy A. Christopher and Toni M. Whited (2005) argued that traditional formulations of the financing decision place the firm at date zero with no cash on hand. Such firms are at the debt versus external equity financing margin, since each dollar of debt replaces a dollar of external equity. The problem with the traditional approach is that corporations do not spend their lives at date zero. Rather, they evolve in a stochastic way, finding themselves at different financing margins over time.