What's Fueling Corporate Debt Fire?

By Wyckoff, Jim | Futures (Cedar Falls, IA), November 1989 | Go to article overview
Save to active project

What's Fueling Corporate Debt Fire?

Wyckoff, Jim, Futures (Cedar Falls, IA)

What's fueling corporate debt fire? Corporate leverage in the United States has increased greatly in the 1980s due to high real interest rates, according to Robert E. Litan, senior fellow at The Brookings Institute in Washington, D.C.

At a National Association of Business Economists meeting in San Francisco in September, Litan said five theories have sought to explain this "explosion" of corporate debt:

* The federal government income tax code's bias toward debt.

"Although this bias is undesirable, it has been presented for many decades and, thus, cannot be a principal factor explaining the upsurge of debt in the 1980s," Litan says.

* "Bull market arbitrage," as Litan calls it, or the leveraged buyout (LBO) activity driven by arbitrage opportunities for firms with leveraged positions in a strong bull market.

"LBO activity, however, has accounted for only 14% of the increase in corporate debt in the last decade. In addition, there is no correlation in industry leverage and the extent of LBO activity," Litan contends.

* The rise of junk bonds.

"By virtually creating a junk bond market, Mike Milken and Drexel Burnham Lambert lowered costs of debt finance," Litan says.

He maintains this development has played a role but doesn't explain inter-industry variations in debt.

* The "free cash flow theory." This explains inter-industry and inter-firm differences in debt and the fact that firms and industries with imbalances between investment opportunities and cash flow are targets of LBOs, takeovers and debt restructurings.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

What's Fueling Corporate Debt Fire?


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?