The Leverage of Growth Firms

Abstract

Theories on the capital structure of growth firms produce inconsistent and puzzling results. We revisit the Modigliani and Miller (M&M) theory on capital structure and value of tax shields. Using the M&M’s arbitrage pricing arguments, we are able to extend the theory to growth firms and reconcile the theories of capital structure for growth firms with the M&M theory for no-growth firms. We unify the theories and resolve the puzzles raised in the literature.