What i have studied from school 0023

Corporation risk, also known as volatility, is a metric measuring the likelihood of financial hardship that is thought to be inversely connected to debt financing levels Companies with more variable c.

Corporation risk, also known as volatility, is a metric measuring the likelihood of financial hardship that is thought to be inversely connected to debt financing levels Companies with more variable cash flows, according to Frank and Goyal (2009), are more likely to experience financial hardship and should employ less debt They claimed that more variable cash flows can lower the likelihood of tax advantages being exploited As a result, under the trade-off argument, increased risk may result in less debt funding Looking at corporate risk from the perspective of earnings, Deesomsak et al (2004) suggested that higher earnings volatility raises the likelihood of financial hardship, since firms may be unable to meet their debt service obligations This means that when profits volatility rises, corporate debt financing levels fall, resulting in an expected inverse relationship Frank and Goyal (2009) stated that firms with fluctuating equity shares are ones that are particularly hazardous, and that such corporations may suffer more from adverse selection in the stock markets As a result, the pecking order hypothesis predicts that these firms, being riskier due to their volatile equities, would have a higher debt financing level Furthermore, according to Frank and Goyal (2009), even firms with variable cash flows may need to access the external capital markets on a regular basis, hence raising debt financing levels • Corporation tax rate Because debt interest payments are normally tax deductible, and dividend payments are not, corporation tax rates should have an impact on debt financing As a result, it is natural that higher tax rates will result in bigger interest tax advantages, inducing more debt financing rather than equity financing This logic is at the heart of the groundbreaking study, and practically all experts now feel that corporation taxes should play a role in corporate debt financing decisions • Liquidity According to the pecking order hypothesis (ztekin and Flannery, 2012), firms with more liquid assets can use them as an internal source of cash instead of debt, resulting in lower debt financing levels Managers can also exploit liquid assets to benefit shareholders