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This paper re‐examines the dividend policy issue by conducting a simultaneous test of the alternative explanations of corporate payout policy using a two‐step procedure that involves factor analysis and multiple regression. Several new proxies for theoretical attributes that have appeared in the literature are introduced, including the role of managerial dimensions in determining dividend policy. Strong support is found for the transaction cost/residual theory of dividends. pecking order argument, and the role of dividends in mitigating agency problems. Strong support is also found for the role of managerial consideration in affecting the firm's payout policy; specifically, firms that maintain stable dividend policies and firms that enjoy financial flexibility pay higher dividends. The results appear to support the tax clientele argument.

Under corporate and personal taxation, we demonstrate that the relation between optimal debt level and business risk is roughly U-shaped. This result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option. Therefore, the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options. Results of empirical tests offer support for the predicted U-shaped relationship. DESPITE THE CONCENSUS THAT business risk is one of the primary determinants of a firm's capital structure, existing theoretical and empirical research does not provide an unambiguous answer to the question of whether an increase in a firm's business risk should lead it to lower the level of debt in its capital structure. Most finance textbooks casually assert an inverse relationship between optimal debt level (ODL) and business risk (BR).1 The basis for this argument is that the existence of debt in the capital structure increases the probability of bankruptcy, and firms with more variable cash flows, that is, higher business risk, have a higher probability of bankruptcy for a given level of debt. Therefore, assuming that the marginal tax rate is the same for all firms, firms with higher BR should have less debt. However, it has been noted that "the existence of positive bankruptcy costs is not sufficient to ensure that the TS-BC (tax shields-bankruptcy costs) hypothesis will predict an inverse relationship (between business risk and ODL)."2 Indeed, Jaffe and Westerfield (1987) prove that, given the appropriate choice of parameters, ODL will be an increasing function of business risk.3 Empirical evidence can be found to support "increasing" as well as "decreasing" 2 Castanias (1983). 3On the other hand, Castanias (1983) derives a decreasing ODL-BR relationship over a certain range of BR when cash flows are normally distributed. 1694The Journal of Finance relationships. Additionally, some empirical studies find no relationship between ODL and BR.4 These studies, however, have generally proceeded by specifying a linear ODL-BR relationship.5 Mikkelson (1984) points out that the lack of a properly specified functional form is an important weakness of empirical research in this area.The main contribution of this paper is to derive the functional form of the ODL-BR relation within the classic personal and corporate taxation framework of optimal capital structure. We show that the ODL-BR relationship is roughly U-shaped; initially decreasing and ultimately increasing, in the DeAngelo and Masulis (1980) framework (henceforth referred to as D-M) in which bankruptcy need not be costly.6 The basic intuition underlying this result is that most models, in which the value-maximizing firm trades off the costs and benefits of debt, can be conceptualized in terms of minimizing the value of the competing claims of non-owners, many of which can be described as options. In the...

Debtor-in-possession (DIP) financing is unique secured financing available to firms filing for Chapter 11. Opponents of DIP financing argue that it leads to overinvestment. Alternatively, DIP financing can allow funding for positive net present value projects that increase the likelihood of reorganization and reduce time in bankruptcy. Using a large sample of bankruptcy filings, we find little evidence of systematic overinvestment. DIP financed firms are more likely to emerge from Chapter 11 than non-DIP financed firms. DIP financed firms have a shorter reorganization period; they are quicker to emerge and also $ We would like to thank Arnoud Boot, Stuart Gilson, Edith Hotchkiss, Jan Krahnen, Eric Rosengren, Per Stromberg, Karin Thorburn, and, particularly, Michael Bradley as well as two anonymous referees for valuable insights and suggestions. The paper has benefited from the comments and suggestions of participants in seminars at