Working Paper: NBER ID: w1523
Authors: Robert A. Taggart Jr.
Abstract: The feelingis widespread that the financial strength of U.S. corporations has eroded over the past twenty years. This trend is often blamed on some combination of the tax system, inflation and overly optimistic assessments of business risk.This paper examines recent corporate financing developments from along-run perspective. It is concluded that these developments appear less dangerous when viewed in the context of the twentieth century as a whole than when viewed in the context of the post-World War II years. A second major conclusion is that powerful corrective mechanisms are at work to keep corporate financial positions from becoming too risky. These forces have been particularly noticeable over the past ten years. Third, the effects on business financing of the tax system, inflation and business risk are difficult to trace in the aggregate data, and these effects may be less straightforward than has commonly been thought. Finally, it is argued that the degree of economic instability and the relative level of federal government borrowing will be key determinants of future corporate financing patterns.
Keywords: Corporate Finance; Debt Financing; Financial Strength; U.S. Corporations
JEL Codes: G32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived business risk (G32) | corporate financing decisions (G32) |
| tax structures (H20) | corporate financing decisions (G32) |
| inflation (E31) | corporate financing decisions (G32) |
| federal government borrowing (H74) | corporate debt ratios (G32) |
| corrective mechanisms (D47) | corporate financial positions (G32) |
| tax system, inflation, business risk (H25) | corporate financing decisions (G32) |
| debt financing reliance has increased (G32) | financial risk (G32) |