When the difference between high and low quality firms is large enough, then the high quality firms raise their debt to equity ratio as a response to rising tax rates.
In two subsequent papers (Cheong 1998, 1999), Cheong finds that if the quality difference between high and low quality firms is sufficiently large then the high quality firms can achieve a unique optimal capital structure which is characterized by a low debt to equity ratio.
12 ounces diver scallops (8 to 10 of the freshest, highest quality, firm), medium dice (½-inch cubes). 2 tablespoons hazelnut oil. 3 tablespoons olive oil. 3 ounces American Caviar.
Likewise, critics of Does Delaware Law Improve Firm Value? have argued that the estimated Delaware premium is too large to be causal, suggesting that ex-ante higher quality firms choose Delaware.
As a result, before looking at the data, one might expect controlled Delaware firms to be worth more than their counterparts incorporated at home both because (1) ex-ante higher quality firms choose Delaware and (2) Delaware's expert judiciary and comprehensive case law increase firm value.
In the presence of a tax benefit to debt financing, they demonstrate that a separating equilibrium in which higher quality firms will issue equity and lower quality firms will issue debt may exist.
"We went with a high-quality firm that's giving their services at cost, doing a good, old-fashioned gumshoe investigation," is all Sarah will say.
Robinson trades at an earnings yield similar to Coke's--4.8%--which my Buffett-based model thinks is attractive enough for this high-quality firm.
At 70% of annual revenue and 17 times trailing earnings, this high-quality firm is cheap enough to be defensive, particularly with a 4% dividend yield.
Its 5% earnings yield isn't a bargain-basement price, but it's a much higher yield than long-term Treasury bonds offer, and my Buffett model thinks it's a good price for such a high-quality firm.
